What is a shareholder?

Shareholders form the backbone of small businesses and enterprises alike  – whether it’s investing capital or influencing key decisions, their role has a direct impact on how a company performs. And with a vested interest in the company’s performance, when the business grows, so does the value of their investment – driving returns.  

This guide will cover the following:  

• Shareholder definition
• What is a shareholder in business?
• Shareholder rights and responsibilities
• Types of shareholders and shareholding structures
• Shareholder rights and responsibilities
• Example of a shareholder
• Do shareholders get paid?
• How to become a shareholder
• What is a shareholder agreement?
• What is the benefit of being a shareholder?
• What are the disadvantages of being a shareholder?
• How Dojo can help
• FAQs

What is a shareholder?

A shareholder, sometimes called a stockholder, is a person, company, or institution that owns at least one share in a limited company. This ownership gives them a stake in the company’s equity and a role in how the business performs. 

What is a shareholder in business?

So what is a shareholder in a company? In a business setting – especially in private companies – shareholders often do more than just hold a stake. They may invest in early-stage growth, advise on key decisions, or support the company’s strategic direction. Their level of involvement often depends on the share class and how many shares they hold.

Shareholder rights and responsibilities

Under UK law, shareholders are entitled to a range of rights and protections that help them stay informed and involved in a company’s operations. When it comes to what rights shareholders have, they include the ability to:

• Vote on key decisions such as appointing directors, approving mergers, or authorising dividends
• receive notice of general meetings
• ask questions at Annual General Meetings (AGMs)
• access annual accounts and inspect certain company records
• view constitutional documents
• receive dividends (when declared)
• take legal action under certain conditions.

Shareholder responsibilities include:

• Following the company’s articles of association
• sticking to any shareholder agreements
• voting on major business changes
• approving financial statements and strategic plans.

Types of shareholders and shareholding structures

Stockholders aren’t all the same – they vary based on how much they own, their rights, and what role they play in the company. Here’s a look at the most common types and how they typically show up in business.

Example of a shareholder

Imagine a tech startup founded by two individuals – they each invest £10,000 and receive 50% of the company’s shares. As shareholders, they both have equal ownership, voting rights, and can claim any future profits. 

Later, the company raises funding – perhaps through venture capital or even business funding from Dojo – and sells 20% of its shares to an investor. That investor also becomes a shareholder, who is now entitled to dividends and a say in major decisions – depending on the share class they hold.

Do shareholders get paid?

Shareholders can make money from their investments in a few key ways:

• Dividends: These are payments made from a company’s distributable profits.  Dividends are not guaranteed and depend on the company’s performance, dividend policy, and available cash runway.
• Capital gains: These are available when stockholders sell their shares for more than they originally paid.
• Profit-sharing: Some companies may offer profit-sharing arrangements depending on their share structure and internal policies. This is less common and varies by business.

How to become a shareholder

Public vs private companies

Public companies are listed on a stock exchange, which means anyone can buy their shares through a stockbroker or investment platform. These shares are available to the general public, and their prices fluctuate based on market performance and investor sentiment.

Private companies, on the other hand, don’t offer shares to the public. Ownership is usually restricted to founders, early investors, or employees. To become a shareholder in a private company, you’d typically need to be offered shares directly or invest through a private funding round.

Common ways to become a shareholder

• Buying shares on the stock market: This applies to public companies. You can buy shares through a brokerage account by choosing the companies you want to invest in and buying their shares at the current market price.
• Being allocated shares when a company is first set up: Founders and early-stage investors are often given shares when a business is incorporated – typically during or just after registering the company.
• Receiving shares via transfer from existing shareholders: In private companies, shares are often transferred between individuals – for example, between co-founders or investors – usually with legal agreements in place.
• Employee options: Many private companies – especially startups – offer employee share option schemes (ESOPs) as part of their compensation packages. These give employees the right to buy company shares, often at a discounted rate.

What is a shareholders' agreement?

A shareholder agreement is a legal document that outlines the rights, responsibilities, and expectations of shareholders. It’s especially important in private companies, where shares aren't traded on the open market and relationships between shareholders can have a big impact on how things work within the business.

Typically, a shareholder agreement covers:

• How decisions are made
• What happens if someone wants to sell their shares
• Dividend policies
• Dispute resolution procedures
• Protection for minority shareholders

What is the benefit of being a shareholder?

• Financial returns: If the company does well, shareholders can receive dividends or benefit from a rise in share value. Over time, this can grow into a hefty sum.
• Say in the company’s direction: Shareholders often have voting rights on key decisions, such as appointing directors or approving major changes. The level of influence depends on how many shares are held.
• Long-term financial gain: Holding shares in a successful company can build wealth over time, especially when investing over a long period. Reinvesting dividends or exercising share options early can also lead to big returns.

What are the disadvantages of being a shareholder?

• Risk of loss if the business underperforms: If the company doesn’t do well, share values can drop, and dividends may go down or be cancelled altogether. In a worst-case scenario, shareholders can lose their entire investment.
• Limited control for minority shareholders: Unless you own a significant portion of the company, your ability to influence decisions is limited – major shareholders or founders often hold more power.
• Disputes: Shareholder disagreements happen, particularly in private companies where personal relationships and long-term plans play a bigger role. Having a solid shareholder agreement in place can help, but conflicts can still affect business operations.