What is a Shareholder? A Simple Guide for Small Business Owners
If you’re a small business owner or thinking about starting a company, you might have heard the term “shareholder” tossed around. But what exactly is a shareholder, and why does it matter? Don’t worry; I’ve got you covered! Today, I’m breaking it all down in simple, friendly terms, so you’ll know exactly what it means and how it might relate to your business.
What is a Shareholder?
First things first, a shareholder (also called a stockholder) is someone who owns a share of a company. Think of a company like a big pie. When someone buys or receives a piece of that pie, they become a shareholder. That “share” represents a slice of ownership in the business.
For example, if you own all the shares of your company, you’re the sole shareholder. If you bring in a partner or an investor, you might give them some shares, and now they’re shareholders too.
Shares are usually given out in exchange for money, services, or other contributions to the business.
What Do Shareholders Do?
Shareholders are essential because they provide the resources, whether it’s money or expertise, that a business needs to grow. Depending on the type of business and the agreement set up, shareholders might have different roles and responsibilities.
Here are a few examples of what shareholders can do:
Voting Power: Shareholders often have a say in major business decisions. For example, they might vote on who sits on the company's board of directors or big changes like mergers.
Profit Sharing: If the business makes money, shareholders may receive a portion of the profits, which are called dividends.
Selling Shares: Shareholders can usually sell their shares to get their money back, especially if the company is doing well.
Limited Liability: One great thing about being a shareholder is limited liability. This means shareholders aren’t personally responsible for the company's debts beyond the shares they own.
Why Should Small Business Owners Care About Shareholders?
If you’re operating a sole proprietorship or a partnership, you might not have any shareholders yet. But if you’re incorporating your business, understanding shareholders is crucial. Here’s why:
Sharing the Load
If you invite shareholders into your business, you’re bringing in people who can contribute money, skills, or advice. It’s like having a team to help carry the weight of running (and growing!) your business.Attracting Investors
Want to grow your business faster? Investors can become shareholders by putting money into your company in exchange for equity. It’s a win-win if handled properly.Growth and Flexibility
When you understand how shareholders and shares work, you have more options for scaling your business. For example, you can issue shares to raise funds instead of taking on a loan.
A Quick Example
Imagine you open a cupcake business called Sweet Dreams Bake Shop. Things are going great, and you need funds to expand into a bigger kitchen. Your friend offers to invest $50,000 in exchange for 20% ownership. By giving them 20% of the shares, you officially make them a shareholder. They now own a piece of Sweet Dreams Bake Shop, and they’re probably rooting for your success just as much as you are.
Once the business grows and starts earning more, you both get to share in the profits (and the delicious cupcakes!).
Types of Shares Explained
When it comes to shares, not all are created equal! Different types of shares give shareholders different rights and benefits, so it’s important to know what’s what. Here’s a quick and simple breakdown of the most common types of shares you might come across as a small business owner.
Common Shares
These are the most straightforward type of shares, and chances are, when people talk about “shares,” they’re referring to common shares. Here’s what you need to know about them:
Voting Power: Common shares usually come with voting rights, which means shareholders can help make key decisions for the business, like electing directors.
Dividends: Common shareholders can earn dividends (a share of the company’s profits), but there's no guarantee. Dividends are paid at the discretion of the company.
Risk and Reward: When the business does well, common shareholders benefit the most. However, they’re also last in line if the company runs into financial trouble.
Example: Imagine your cupcake business, Sweet Dreams Bake Shop, has just two shareholders, you and your best friend. You each hold 50 common shares, which means you both get a say in decisions about the business and share equally in any potential profits.
Preferred Shares
Preferred shares are a bit of a step up. They come with some additional perks, but they also don’t usually include voting rights. Here’s how they differ:
Priority Dividends: Preferred shareholders get paid dividends before common shareholders. This makes them a preferred choice for those looking for steady income.
Less Risk: If something goes wrong financially, preferred shareholders are higher up on the list of who gets paid back.
No Voting Rights: Unlike common shares, preferred shares usually don’t allow shareholders to vote on business decisions.
Example: To fund your bakery expansion, a family member invests in Sweet Dreams Bake Shop. You issue them 20 preferred shares in exchange for their investment. They don’t get involved in decision-making, but they know they’ll receive a fixed dividend before you or your best friend take any profits.
Which Type of Shares Should You Know About?
For small businesses, common shares are often the most relevant, especially if you’re the only shareholder or working with just a few partners. However, as your business grows and you bring in investors, preferred shares might be something to explore, as they can help attract people looking for lower risk and steady returns.
Understanding the differences between these types of shares helps you make informed decisions and opens the door to opportunities for funding, collaboration, and growth for your business. If you’re unsure about which approach is right for you, consider reaching out to a trusted advisor or bookkeeper (like me!) to guide you through it.
Some Common Questions About Shareholders
Q: Do shareholders run the company?
Not exactly. Shareholders own a part of the business, but they are not necessarily involved in day-to-day operations. That’s usually the job of directors or managers.
Q: Can a company have just one shareholder?
Absolutely! Many small businesses have just one shareholder, especially when they first start. That shareholder is often you, the business owner.
Q: What happens if the company doesn’t make money?
Shareholders don’t have to pay the company’s debts from their personal funds. While they may lose the money they’ve invested in the shares, their personal assets are safe.
Wrapping Up
Understanding shareholders and their role in a business doesn’t have to be complicated. If you’re thinking about bringing on investors, incorporating, or just planning for the future of your company, knowing these basics will give you a strong foundation.
And remember, I’m here to help with more than just the definitions. Whether you’re navigating profits, taxes, or payroll, having trusted bookkeeping support is a game-changer for your growing business. If you have any questions, don’t hesitate to reach out—I’d love to help you feel confident as your business blossoms!