Does a director have to be a shareholder?

As you work through the limited company formation process, you are required to appoint people to various roles in the company. Amongst other things, you will need to appoint directors and you will also need to state who the shareholders will be. This gives rise to the question – do you need to be a shareholder to be a director?

In this article, we will explain whether a company director must also be a shareholder. We’ll also clarify the differences between these roles and take a look at some other roles within a company.

Do I need to be a shareholder to be a director?

The short answer is no, you don’t. There is no requirement under the Companies Act 2006 for a person to be a shareholder for them to be eligible to be a director (and vice versa). However, there are a couple of things you need to consider.

First, you must appoint at least one director and at least one shareholder when setting up your company – whether you are applying directly or through a company formation agent. The same person may be appointed for both roles, but they can be filled by separate individuals.

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Secondly, whilst there is no legal requirement for a director to be a shareholder, some companies choose to include a “shareholder qualification” clause in their articles of association.

A shareholder qualification clause means you can only be a director if you hold shares in that company. In other words, if a person does not hold shares in the company, they cannot be appointed as director. This type of clause is particularly common in property management companies.

If you add a shareholder qualification clause to your articles of association, then you must abide by it, regardless of the fact the Companies Act 2006 sets no such requirement. If, at a later point, you do wish to appoint a director who is not a shareholder, you will need to do either one of the following things before the appointment can be completed:

1. Give that person shares in the company, so that they meet the shareholder qualification requirements; or
2. Amend your articles of association to remove the shareholder qualification.

Directors vs shareholders

To know how to assign these roles, it’s important to establish the differences between directors and shareholders.

Shareholders

Shareholders own a portion of the company. Also known as ‘members’, shareholders invest money into the business and, in return for their investment, they are issued a certain number of shares.

These shares represent the shareholder’s ownership of the company, and it gives them certain rights and responsibilities. The exact extent of their ownership and the rights and responsibilities they are given will depend on the number and proportion of shares they hold, together with the rights and responsibilities attached to those shares.

In practical terms, the responsibilities a shareholder has are usually rather limited. The big one is that they agree to take on a certain level of liability, which they will have to pay if the company ever requires them to, or if the company is unable to pay its debt.

The good news is that the level of liability is not unlimited – it is limited to the amount the shares were issued for. The amount the shares are issued for is usually the nominal value (which is the minimum price the shares can be issued for – usually £1.00). Beyond that, there isn’t normally much else that shareholders are responsible for.

In exchange, shareholders get to enjoy certain rights. As mentioned, the actual rights can differ depending on the particulars (or “rights”) attached to those shares. The particulars are usually outlined in the articles of association or shareholders’ agreement (if there is one).

Whilst they can vary between companies, holding a share will usually entitle the shareholder to the following rights:

• Voting rights: A shareholder typically has the right to attend general meetings of the company and to vote on any shareholder resolutions, with one vote per share. The higher the number of votes they have vis-à-vis other shareholders, the more influence they have on the company.
• Dividend rights: Shareholders are usually entitled to receive any dividends paid by the company, in proportion to their holding.
• Capital distribution rights: Shareholders will also normally have the right to participate in any capital distributions the company makes. For example, on a winding up of the company. The extent of their participation is often dependent on the proportion of their shareholding.

Directors

Unlike shareholders, the role of the director is to manage the day-to-day affairs of the company. In addition to running the business, they hold several statutory responsibilities including, but not limited to:

• Filing the annual confirmation statement
• Filing annual accounts (even if the company is dormant)
• Filing a tax return and paying corporation tax
• Filing a VAT return and paying VAT (if applicable)
• Managing changes to the company’s officers and updating their details
• Managing changes to the company’s registered address
• Registering charges (security given for a loan, e.g. mortgage)

Directors are also responsible for ensuring the company complies with all other relevant legislation. This can be anything from health and safety laws to product safety laws.

Additionally, in everything they do, directors must comply with the 7 “director duties”. These are listed in sections 171-177 of the Companies Act 2006 and involve requirements such as acting within their powers or exercising independent judgement.

As directors are not owners, they are generally not responsible for a company’s debt. Nonetheless, failure to uphold their statutory duties can result in penalties. These can include a fine, disqualification, a criminal record, and in some cases, a custodial sentence.

Other key roles in a limited company

As well as directors and shareholders, there are other positions to consider when starting your company.

Secretary

During incorporation, you may look to appoint a company secretary. This is optional for private limited companies but is mandatory for all public limited companies (PLCs).

Generally speaking, a company secretary’s responsibility is to assist the director(s) in fulfilling their legal responsibilities. Although the exact role differs from company to company, examples of their responsibilities include:

• Maintaining the company’s statutory records, making sure they are accurate and up to date
• Filing the company’s confirmation statements and annual accounts
• Notifying Companies House about changes to company details, such as officer appointments, changes to the articles, or changes to the registered address
• Arranging board meetings and producing minutes
• Ensuring the company remains legally compliant, in particular with respect to the Companies Act 2006
• Keeping the company’s legal documents secure, including the certificate of incorporation, share certificates, and articles of association

Whilst the directors retain their legal responsibility for the fulfilment of their duties, many choose to appoint a secretary to help share some of the workload.

Person with significant control (PSC)

Every company needs to report who the People with Significant Control are. A PSC is someone who ultimately controls the company. It is not so much a position that someone is appointed to, but rather it is something that someone “is” if they meet the requirements for being a PSC.

A PSC is a person who meets one of these criteria:

• Holds, directly or indirectly, more than 25% of shares in the company
• Holds, directly or indirectly, more than 25% of voting rights in the company
• Has the right to appoint or remove the majority of the board of directors
• Has the right to exercise, or actually exercises, significant influence or control over a company; or,
• Has controlling influence over a trust or firm which has a controlling interest in the company

In essence, every UK company must maintain a Register of PSCs. This register lists the names of each PSC and how they control the company. In other words, if a person meets the criteria for being a PSC for a company, then they must be entered into the Register of PSCs and reported to Companies House.

In most companies, the shareholders will usually be the PSCs, although this isn’t always the case. To help identify your PSC, you should refer to your company’s register of members and articles of association for details on share ownership and each shareholder’s voting rights.

Summary

There is no legal requirement for a limited company director to also be a shareholder. So as a general rule, a person can be made a director, a shareholder, or both.

The position of directors and shareholders differs in the remit of their role, their rights, and their responsibilities. Directors run the company – they take care of its daily management, and file and organise annual accounts and other legal documents, but are not generally liable for the company’s debt.

Meanwhile, shareholders own the company. They take on a financial liability and, in exchange, they can usually receive dividends or vote on shareholder resolutions. How you assign these roles is your choice and depends on how you want your company to be run.

We hope you found this guide useful in understanding the differences between directors and shareholders. If you have any questions or comments, please post them below, or get in touch with our Customer Service Team.