Difference Between an Individual Shareholder and a Corporate Shareholder in the UK
Unless otherwise indicated, the UK company stated in this quotation refers to a private company limited by shares formed and incorporated in UK in accordance with United Kingdom Companies Act 2006.
If company only has one shareholder, it means the shareholder owns 100% of the company. A company ‘limited by shares?must have at least one shareholder but there will be no maximum number of shareholders.
A shareholder is an owner invested in a company. Shareholders receive ownership rights based on their percentage of shares invested in a company. Under general circumstances, the bigger proportion of the total shares a shareholder owns, the higher the power of votes rights the shareholder can agree to or object against important matters of the company.
A shareholder can be an individual or a company (corporate shareholder) who provide capital to business ventures with the purpose of earning financial returns. The returns can be delivered from receiving dividends and an increase of share price.
The rights of a corporate shareholder have the same rights as of an individual shareholder if both are holding the same class of the share capital in one company.
- Individual Shareholder
Most ordinary individuals can invest money in shares of a company or companies. With buying shares, the person is investing in the equity of a company, and the company’s future profit flows and often gains voting rights (based on the number of shares owned) to give voices to the direction of the company.
An individual shareholder uses his own money to set up a limited company to run his own business. He will usually be the representative of his shareholding and appoint himself as the director of the company he set up.
- Corporate Shareholder
A corporate shareholder is a business entity that owns shares in another limited company. The term ‘corporate shareholder?may refer to another limited company, a group of companies, a general partnership or limited liability partnership, a non-profit organisation or charity, a trust, or a community interest company (CIC). Essentially, any non-human legal entity that can own shares can be a corporate shareholder.
- Corporate Representative
A corporate shareholder has to appoint a representative to exercise its shareholder rights and represent the corporate to express its needs. The representative is usually appointed as a director in the invested company.
Some corporate shareholders appoint different representatives to represent their interests of different classes of shares. This often happens if each director of the corporate entity wants equal say in the way their company is represented as a shareholder.
The representatives act in accordance with the powers granted by the corporate shareholders. In most cases, they have complete freedom to represent the corporate shareholder in any way they see fit.
- Shareholder Rights
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Right to vote
Right to vote includes electing directors and proposals for fundamental changes affecting the company such as mergers or liquidation. Voting usually takes place at the company’s annual meeting.
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Right to receive dividends
When a company earns profit, the board of directors have two options. One option is to retain the profit and use it for business expansion. The other option is to decide what profit percentage will be distributed as dividend.
Shareholders will receive dividend payments in proportion to the shares held or in according to the company’s articles. Dividends can be distributed in multiple times provided the company has enough retained post-tax profits.
If a company has distributed the value of dividends exceed their post-tax profits, the dividend will be deemed illegal and the company could face severe consequences from HMRC.
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Right to inspect corporate books and records
Shareholders have the right to examine basic documents such as company bylaws and minutes of board meetings.
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Right to sue for wrongful acts
Shareholders have the right to sue for any wrongful act within the company. A lawsuit can be filed by the individual shareholder, a group of shareholders, or a class of shareholders. Shareholder can file a lawsuit against the executive officer/director of the company for any fraud or mismanagement, misrepresentation of financial statements or any other wrongful act done by the critical person either by ignorance or by wilfulness.
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- Differences
A corporate shareholder is a corporation that owns shares in another corporation. An individual shareholder is a person that owns shares in a corporation. This distinctions is easy enough, but in practice, it has several corporate governance and taxation differences
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Corporate Interest
Usually, corporations tend to have much greater resources than individual investors, corporate shareholders may buy and own huge chunks of a corporation. Corporate shareholders are likely to be more active in the policies making and the development of the invested company. Individual investors, meanwhile, may not have enough knowledge in decision making.
In other instances, action by corporate shareholders could result in a corporate’s strategic policies being tailored to benefit the largest investors. For example, a corporate shareholder may be interested in dividend income rather than in investing profits to grow the company.
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Taxation Issues
When an individual invests in a limited company, all dividends received are taxed as his personal income. The individual gets a dividend allowance each tax year. The dividend allowance and tax rates for the tax year to 5 April 2023 is ?,000.00 and from basic rate of 8.75% to additional rate of 39.35% depending on the total income of the individual earned in a tax year.
A corporate shareholder receives dividends as the same way as an individual who invested in a company. However, as the corporate shareholder is usually another limited company, the dividends received will be treated as investments income of the company. The dividends are treated as taxable profits for Corporation Tax. For example, Company X received dividends of ?0,000 from Company Y on 31/01/2022. Company X will use the same corporation tax rate (19% for 2022) as calculating for other profits to work out the tax liability for the dividends.
If Company X then distributes its after tax profit as dividends to its individual shareholders, the dividends received by the individual shareholders are to be reported as their personal income and submit their Self-Assessment Tax Return to HMRC individually.
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See also:
UK Company Share Transfer Procedures and Fees
UK Company Capital Increase Procedures and Fees
UK Company Registration Procedures and Fees
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