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By Lynne Gowers on 28th July 2015
Setting up a limited company is a popular choice for freelancers and self-employed people as the scope and scale of their operation becomes larger over time.
Early on in your freelance career, it can be beneficial to operate as a sole trader and take advantage of the flexibility this can provide; however, as your business continues to grow, you may find the formalised structure a limited company provides could help you take your success to the next level.
While there are all sorts of benefits associated with such a move, you’ll also certainly need to be aware of the additional administrative requirements this creates. One of the most important considerations is the emerging role and the difference between shareholders and directors – both key players in the development of the company, but whose functions and responsibilities differ in important ways.
If you lack understanding of the difference between the two, then it may be a good idea to get educated on the subject before you make the transition to becoming a limited company. After all, keeping up-to-date on such matters will be important if you want to manage your firm in an effective and legally compliant way.
Also known as members, shareholders have a stake in the ownership of the company itself, obtained through the purchasing of shares issued by the management. When founding the limited company, you’ll be required to issue at least one share, meaning there will always be a minimum of one shareholder.
The investment of the shareholders forms the basis of the legal existence of the organisation, but despite this, shareholders do not have an automatic right to take part in the day-to-day management of the firm: this is a function that is delegated to the directors.
Although they are not involved in the everyday activities of the company, they still have a number of key responsibilities, including deciding what powers and responsibilities the directors will have, as well as sometimes removing directors from power if they are not deemed to be doing a good job.
Shareholders can also make important decisions about the company’s name and structure, the issuing of further shares and setting directors’ salary levels.
As a shareholder, your power and control over the company depends on what proportion of the business you own. Buying a greater number of shares gives you more of a controlling voice in its affairs, as well as the right to a more substantial portion of available profits through dividends.
Also known as company officers, directors are appointed to a business at the shareholders’ discretion and are tasked with handling the nuts and bolts of running the company on an everyday basis.
In exchange for a salary and dividend payments, directors are legally required to serve the best interests of the company and pursue strategies that will drive profitability and growth – as opposed to shareholders, who have greater leeway to use their stakes in the company for their own personal interests.
Working together with other directors as part of a board, company officers are ultimately accountable to the shareholders and to the organisation itself, and it is this principle that will govern their actions.
It’s important to understand the difference between these two key functions, especially if you’re working as part of a small start-up company where individual responsibilities have not been fully codified.
It is possible to serve as a shareholder and a director simultaneously, but naturally this will mean you’ll have to be able to separate the responsibilities of the two functions and act accordingly when serving in either capacity.
The division of responsibility and the relationship between directors and shareholders is often set out in the company’s articles of association, so it’s vital that you make yourself aware of all of the ins and outs before establishing the business. In doing so, you’ll be able to make sure everyone involved is acting in a way that’s legally compliant and beneficial to the future success of your fledgling organisation.
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