What is a Shareholder or Stockholder of a Corporation?
Corporations are unique business entities because they are owned by a group of people who own the business, buy shares of stock in the business, and who then (in many cases) sit back and watch to see if their shares grow. This article discusses shareholders and stockholders and their unique tax situation.
What is the Difference Between a Shareholder and a Stockholder?
Shareholders and stockholders are basically the same things. They both describe someone who owns shares of stock in a business. So, holding shares and holding stock mean the same. For the purposes of this article, we'll use the term "shareholders."
Shareholders are individuals, companies, or trusts, that own shares of a for-profit corporation. The individuals own a specific number of shares, which they each purchased at a specific price.
The stockholders have invested their money to purchase these shares and they gain in two ways:
- Through dividends paid based on the number of shares owned by the shareholder, and due to the corporation's profits, and
- By selling their shares at a profit.
Shareholders in Public Corporations vs. Closely Held Corporations
Most small corporations are closely held. That is, they have a few shareholders, most of whom know each other and in many cases these shareholders are from the same family or have other business or personal relationships.
In a publicly held corporation, there can be millions of shareholders. and millions of shares held. The individual shareholders have no direct involvement with the company, except to vote their shares on issues brought up at the annual meeting.
Another difference between public and closely held or private corporations is regulation. A public corporation is regulated by the Securities and Exchange Commission (SEC), but there is no external regulation of the shares in a privately held corporation.
What Happens if the Shares Go Down
Being a shareholder means taking the ride as the company's stock goes up and down. A shareholder in a publicly held shareholder can sell some or all of the shares, at whatever the market price is at the time. If the shares are publicly held, it's easy to determine the share price. But, in a closely held corporation, there is no ready market for the shares, so it's almost impossible to determine a price or to sell shares to someone else.
Shareholders and the Annual Meeting
One of the most interesting things about being a shareholder of a corporation is that you have the right to attend the annual meeting. Even if you have only one share in a company, you can go to this meeting. Probably the most well-known corporate annual meeting is held by Berkshire Hathaway, whose chairman, Warren Buffett, holds a lively and interesting session every year.
Different Types of Shareholders
Large corporations have different types of shareholders and types of stock that they own. Usually, a corporation will start out with common stock. Shareholders holding common stock have voting rights (one vote per share), they get dividends when the corporation pays them, and they can sell their shares for a profit (or a loss). Common stock shareholders are taking a bigger risk because they can lose their investment.
Some companies also have preferred stock and shareholders. Dividends must be paid to these shareholders before they are paid to common stock owners, but these shareholders do not have voting rights. Preferred shares are like a hybrid, with characteristics of both stocks and bonds.
Which Shareholders are in Control?
A shareholder has controlling interest in a corporation if the shareholder has a majority of the voting shares of stock in that corporation. Having controlling interest means that the owner of the controlling shares can control any decision made by the shareholders and override any other shareholder opinions or votes. Depending on the bylaws of the corporation, a two-thirds interest may be required to pass any motion. In this case, controlling interest would be 34 percent of the votes (preventing a two-thirds vote by any other person or group).
Different Types of Investors in a Corporation
In addition to the shareholders, there are others who have a stake in the success of the corporation. This other type of investor consists of bond-holders, who are to whom the corporation owes money.
These two types of investors are:
- Equity (ownership) investors, who own shares in the company, and
- Debt investors, who buy corporate bonds, which pay a fixed return on their investment.
Shareholders and Double Taxes
For years there has been a discussion about the perceived unfairness of what is called "double taxation" on corporate shareholders. Briefly, double taxation, as imposed by the IRS, is first a tax on the earnings of the corporation, then a tax on those earnings distributed to shareholders as dividends.
If the corporation decides not to pay dividends, and instead reinvests the corporation's profits in growth (this is called retained earnings), no dividends are paid, and no taxes on those dividends.
Shareholders in small, closely-held businesses typically do not receive dividends. Many of these individuals work in the company as employees, and they pay taxes on their employment income.
Shareholders in a Corporate Bankruptcy
The rights of the shareholders are subordinated (placed under) the rights of bond-holders so that shareholders lose the value of their shares if the corporation becomes bankrupt. Shareholders may also lose some or all of the value of their shares if the stock price is lower when they sell than the price when they bought.