Do directors also have to be shareholders in a limited company?

To set up a private company limited by shares, you must have at least one director and one shareholder. These are entirely separate roles with different rights and obligations. However, it is common for the same people to hold both positions simultaneously, particularly in smaller owner-managed companies.

This article explains whether directors must also be shareholders (or vice versa) and the main differences between these two crucial roles in a company limited by shares.

Directors do not have to hold shares in a limited company

There is no legal requirement for the directors of a limited company to also be shareholders. Similarly, a shareholder has no automatic right under the law to be a director. Nevertheless, it’s common for at least one person in a company to hold both positions simultaneously.

In most companies, directors hold shares, whether they are founding members or have been appointed to run the business on behalf of the other shareholders.

But it would be highly unusual for every shareholder to be a director in companies with multiple investors or employee share schemes. It simply wouldn’t work from a practical standpoint.

The only time that directors must be shareholders, or vice versa, is when the articles of association include a share qualification provision. This optional clause stipulates that a person is required to hold a specified number of shares to qualify for appointment as a director of the company.

There is no such provision in the default ‘model’ articles, which most companies adopt as their governing document. However, many companies amend the model version or write bespoke articles to meet the business’s specific needs.

This is why directors and shareholders should familiarise themselves with their company’s articles of association. Many firms also have shareholders’ agreements in place, which may include additional rules or restrictions on holding shares.

The difference between company directors and shareholders

In the most basic sense, shareholders are the owners of a company and have ultimate control over the business, while directors manage a company on behalf of the shareholders. They are often the same people, but not always.

Rights and obligations of shareholders

Shareholders are the members of a company limited by shares. They own all or part of the business by taking one or more shares in the company, usually in exchange for capital investment.

Shares provide certain rights to members, such as appointing and removing directors, voting on the outcome of certain company decisions, and receiving a portion of profits in the form of dividend payments.

As the owners of a company, shareholders also have limited liability for the financial obligations of the business. This means they are liable for the value of their shares if the company becomes insolvent. Beyond that sum, the company is responsible for its own debts.

Rights and duties of company directors

Directors are legally responsible for overseeing a company’s day-to-day business and operations on behalf of its members. They exercise the company’s powers, make all routine and strategic business decisions, and ensure the company complies with its legal and regulatory requirements, such as:

• filing annual accounts and confirmation statements at Companies House
• preparing tax returns for HMRC and paying any taxes due on profits
• ensuring all company information is kept up to date on the public register
• approving the issue or transfer of company shares
• keeping accurate business and accounting records

The duties and powers of directors are set out in the Companies Act 2006 and the articles of association. Additional responsibilities are often included in shareholders’ and director’s services agreements.

Directors may be subject to statutory penalties if they fail to uphold their legal duties. Typically, they are not liable for company debts or losses unless they breach their duties or provide a personal guarantee to satisfy the contractual obligations of the business.

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