In this era of startups, forming a company has become a simplified process. With all sorts of benefits and compliances that is required to be compiled, one is ought to understand the difference between the Shareholders and Directors – the key persons upon whom the responsibility of running a company relies.
The basic difference is that Shareholders or Members means a person who is a subscriber to the memorandum of the company or is entered as a member in the Register of Members, or any person holding shares of the company as a beneficial owner in the records of a depository. Directors are the officers of the company, appointed to the board of the company by the shareholders who manage company’s affair.
Both Shareholders Directors and have different roles to play in order to run a company. While the former is the owner of the company, the latter is the manager of the company on behalf of the shareholders. One can assume the roles of both director and shareholders, or can also be only a director or shareholder of the company unless the articles otherwise provide.
The Board of directors is entrusted with complying legal formalities required and act in the best interest of the company whereas the shareholders are not involved in the day to day business or management of the company unless they form the part of the board. Power to make decision lies both in the directors ( for instance recommendation for declaration of dividend, calling for unpaid shares, consideration of directors report etc) and shareholders (like the appointment of directors, auditors, approval of financial statements, investment opportunities, issuing shares, etc.). In other words, the day to day operations depends on the directors. However, the crucial decisions can only be taken after the consent of the members.
The minimum number of directors for a Private company is 2, for Public Company is 3, for OPC is 1. The minimum number of shareholders required for a private company is 2 whereas for a public company is 7 and OPC can have only one member.
The responsibility to remove a director lies with that of the shareholders of the company but in case the directors attract any provisions as stated in Section 164 of the Companies Act 2013, they are responsible to disclose the particulars of their disqualifications and vacate the office. The shareholders of the company cannot be removed from the company except by the order of any judicial or quasi-judicial bodies like NCLT. However, the shareholders, at their own discretion, transfer their shares to others.
There is also parity in regard to receipt of money from a company. While the shareholders are entitled to receive part of profits as dividend, directors are entitled to receive remuneration and sitting fees from the company or any other fees as provided to them for services provided in any other capacity.
Thus, Shareholders and the Directors are an integral part that is responsible for the successful running of the company. Their relationship is a complex as both are mutually dependant on each other. Hence, transparency is required to be maintained. Both should go hand in hand for the benefit of the organization as a whole.
This article was drafted with the help of inputs provided by Itei Agarwal from our Corporate Law Team. If you have any queries feel free to drop a line at firstname.lastname@example.org.