What is the difference between a Shareholder and a Director?

A lot of businesses out there will be set up as shown below - in our example, we have 3 owners (shareholders) and 3 directors. Each person might be contributing a different amount of money, and might have different roles of the business.

The NWA pizza shop


It’s important to realise that although all 3 people are involved in the business, they have different roles as shareholders and directors.

Area

Shareholder

Director

Ownership

Own the company

Have no ownership interest (unless they are also a shareholder)

Management decisions (day to day running of the business)

No decisions to do with management (except for a handful of important decisions)

Responsible for day to day running of the business

Interests

Can act in their own best interests

Must act in the best interests of the company (even when this is in conflict with their own personal interests).


Should shareholders be directors (and should directors be shareholders)?

There’s an argument to be made that especially in small businesses, it is a good idea for those involved in the business to be both shareholders and directors.

If someone, say Kendrick, owns part of a business, he has a vested interest in making that business work and he’ll roll up his sleeves to get the job done. In this way, the self-interest of the directors and those of the shareholders become one and the same - they’re linked and follow the same path (you’d hope).

This question really turns on a practical question - what is each person actually going to do in the business?

If someone is going to be actively involved in the business day to day (say, making pizzas in a pizza joint, setting the menu, choosing the fitout for the store) and is also tipping in money, then it makes sense for them to be both a shareholder and director (and, a kick-ass pizza chef).

On the other hand, his business partner has a full time job and just wants to invest some money (and get the occasional slice on the house). He wants to get a share of the profits at the end of the year, but he doesn’t have time to commit to the business. He might consider being a shareholder only.