In a typical owner-managed company, the founder holds all the shares and also sits on the board as a director. Because one person wears both hats, the distinction between the two roles is easy to overlook. It becomes important as soon as a business takes on investors, brings in a business partner, appoints an outside director or runs into difficulty. Understanding where the line falls helps everyone involved know what they can decide, what they are responsible for and what they are risking.
Shareholders Own the Company
Shareholders, also known as members, are the owners of a company limited by shares. Their ownership is measured by the number and class of shares they hold and is recorded in the company's register of members. A private company limited by shares (LTD) can have between 1 and 149 members, and shareholders can be individuals or other companies, resident in Ireland or abroad.
Shareholders' rights generally include the right to receive dividends when declared, to vote at general meetings, to receive the company's financial statements and to share in any surplus if the company is wound up. Their liability is limited to the amount, if any, unpaid on their shares.
Directors Manage the Company
Directors are responsible for managing the company's business. Under the Companies Act 2014, the business of a company is managed by its directors, who may exercise all the powers of the company except those reserved to the members. Directors make operational and strategic decisions, enter contracts on the company's behalf, appoint staff and oversee the company's finances and compliance.
A director must be an individual aged 18 or over; a company cannot act as a director of an Irish company. An LTD needs at least one director, together with a separate company secretary, and at least one director must be resident in the European Economic Area unless a Section 137 bond is in place.
Decisions Reserved to Shareholders
While directors run the company day to day, certain key decisions can only be taken by the shareholders, usually by ordinary resolution (a simple majority) or special resolution (at least 75% of the votes cast). These include:
- Appointing and removing directors.
- Amending the company's constitution or changing its name.
- Declaring final dividends, up to the amount recommended by the directors.
- Approving certain transactions with directors, such as substantial property transactions.
- Placing the company into members' voluntary liquidation.
The constitution or a shareholders' agreement can add further matters that require shareholder approval, which is common where there are several owners or outside investors.
Duties and Liability
The most important practical difference between the two roles lies in their legal duties. Shareholders generally owe no duties to the company and can vote in their own interests. Directors, by contrast, owe statutory fiduciary duties to the company under section 228 of the Companies Act 2014, including duties to act in good faith, avoid conflicts of interest and exercise reasonable care, skill and diligence. Directors are also responsible for the company's compliance with company law.
This means that while a shareholder's risk is limited to their investment, a director can, in certain circumstances, face personal liability, for example for reckless trading, or be restricted or disqualified from acting as a director in future.
How Each Role Is Paid
Directors are typically paid a salary or fees for their work, which are processed through payroll and subject to PAYE, USC and PRSI. Shareholders are rewarded through dividends, which are paid out of distributable profits and are generally subject to 25% dividend withholding tax. Owner-managers who hold both roles can receive both, and the balance between salary and dividends has a significant effect on their overall tax position.
Protecting Minority Shareholders
Where shareholders do not sit on the board, they rely on the directors to run the company properly. Irish law gives minority shareholders certain protections, including the right to apply to court where the company's affairs are being conducted in an oppressive manner or in disregard of their interests. A well-drafted shareholders' agreement can provide further clarity on decision-making, dividend policy and what happens if a shareholder wishes to leave.
Records and Filings
Both roles are reflected in the company's records. Changes of shareholders are recorded in the register of members and shown on the annual return, while changes of directors must be notified to the Companies Registration Office within 14 days. Shareholders holding more than 25% of the company are also reported as beneficial owners to the Register of Beneficial Ownership.
For further guidance and support with your company's shareholder and director structure, contact Setup Your Company at info@setupyourcompany.ie or call us on 01 628 3177.
