A shareholder is a legal entity which has some ownership of a share or shares within a joint stock company. A shareholder might be an individual person or a company itself. Shareholders technically are the parties that own a company, and thus, the purpose of a company owned by shareholders is generally to increase the value of every shareholder’s share. This purpose is borne out usually as a result of a shareholder being capable of influencing the actual policies and conduct of the company in which he or she owns a share or shares.
A shareholder might have such powers within a company as the ability to vote on certain matters internal to the operation of the company and the ability to propose and advocate resolutions within the company, in addition to any rights the shareholder might hold towards the property of the company and the company’s profits. None of these rights are necessarily uniform, however, as each company might grant a shareholder a somewhat different set of rights.
Furthermore, under law, shareholders do not have as much of a right to the assets of a company, including property and profits, as do creditors. In other words, creditors have first claim to such assets and if no property is left after creditors have laid their claim, then the shareholders will not get any property out of the company in the event of its dissolution. Usually, the power and claim a shareholder holds with reference to a company is equal to how many shares that shareholder has in the company.
What is a Shareholder?
1. The term “shareholder” is referring to any institution or individual that legally purchases equity in a publicly or privately held corporation. When they purchasing equity they receive a stock certificate, which denotes legal ownership in the public or private corporation.
2. A piece of stock represents partial ownership in the underlying corporation being purchased. If the company does well and earns a profit, the investment into the company (the purchase of stock) will increase in value.
Shareholders represent one of the fundamental aspects of a corporation. When a corporation possesses shareholders it spreads its liability to the individual investors. In addition, the presence of shareholders is an effective way to raise capital for a corporation.
3. Corporations who issue stock do so through an intermediary, such as a stock exchange. Through the presence of an exchange, an individual investor can purchase a percentage ownership in the underlying corporation. One of the key characteristics of stock is found in the ease of transferability.
4. When an individual invests in a corporation through the purchase of stock they obtain numerous privileges on the class of stock. The shareholder is legally allowed to sell their shares on the open market and they may also vote on the directors nominated by the Board. Furthermore, shareholders are also awarded the right to nominate directors and propose various shareholder resolutions.
5. In addition to these fundamental rights, shareholders also have the right to declare dividends, purchase new shares issued by the company, and liquidate whichever assets they feel appropriate.
6. Although the purchase of stock in a corporation represents a percentage ownership in the enterprise’s business function, it does not denote absolute ownership in the company. Shareholders do not possess the right to claim the company’s profit (if a company realizes a profit it will be reflected in the stock price), nor do they possess the right to contribute to fundamental decisions such as the purchase of capital or exercising the intricacies associated with the profit-based business model.
Legal Implications for a Shareholder
1. When a corporation issues stock, it does so to diversify its risks and liabilities. Unlike a general partnership or a sole proprietorship, a corporation, through the issuance of general stock, strips away its liability if insolvency is realized. Although a corporation (meaning the directors of the Board) are responsible for debt obligations, they are not completely liable if insolvency issues arise or if the company experiences a downturn. Those corporations who fail to earn a profit or who experience economic hardships are considered to possess limited liability because of much of the impact is realized by the shareholders.
2. When a corporation or company fails to realize a profit, the stock price will be negatively affected. If the company goes insolvent, the stock price will ultimately go down to 0. When this occurs, those who have invested in the corporation will realize a complete loss of their investment. That being said, the only loss that can be actualized is based on the amount invested.