Telling the difference between these three can sometimes be confusing. We’re here to help you know what the difference is. 

Shareholders 

First of all, what is a share? By purchasing shares in a business, you gain part or sole ownership of that company. Shares can be bought by an individual or a corporate body, such as an investor or a venture capital firm. Creating company shares is a well-known way to raise capital for investment in your business. 
 
An advantage of raising money in this way, is that you don’t have to pay the money back or pay any interest on it, instead these investors are given a share of the company profits, known as dividends. 
 
A shareholder is someone who owns a stake in a limited company by the means of purchasing one or more shares. There can be multiple shareholders in one business and the proportion of ownership of the company depends on the number, value and class of the shares issued. Each shareholder’s voting, dividend and capital rights depend on the Prescribed Particulars attached to their shares. 
 
Most shareholders are not involved in the everyday running of the company, unless they are directors as well as shareholders. Typically, shareholders’ powers can include: 
- the power to appoint or remove directors and company secretaries 
- choosing which powers and rights are given to company directors 
- input into the renaming of the company or a change to its structure 
- involvement in investment opportunities and issuing further shares 
- selecting an auditor to inspect the company accounts 
- altering the Articles of Association and the Shareholders’ Agreement 
- rights to a share of any surplus capital if the company is wound up 
 
Because there is a high level of flexibility to the legal structure of shares issued in your company, this is a popular choice for raising capital for new or established businesses. 

Directors 

When you set up your own company and become a director, it’s important that you understand your legal obligations and duties, these include: 
 
- at least one appointed director 
- they must be over the age of 16 
- a director can also be a shareholder 
- responsible for managing the company in accordance with the Companies Act 2006 and the Articles of Association 
- required to run the business within the model set out in the Articles of Association 
- draw a salary from the business 
- if a shareholder, receive divined payments 
- expected to promote the business and run it in a way that will make a profit and benefit the shareholders, if there are any 
- deliver annual accounts, confirmation statements and company tax returns to the HMRC 
- ensure all taxes are paid within the deadlines 
 
If you are a director of a company with shareholders, you are accountable to them and they can remove or disqualify you if you’re seen to be unfit to manage the business. You can also be held personally liable and prosecuted if you fail to uphold your legal responsibilities and duties.. 

Employees 

An employee is an individual who is employed to do a specific job by an employer. The terms of employment must be specified within the employment contract. These terms are negotiated between each employee and their employer and can vary greatly between each position. 
 
It’s important that you read and understand the terms of your contract before you sign it. As an employee in the UK you have certain employment rights, these usually require a minimum length of continuous employment before you qualify for them. 
Employees’ rights can include: 
 
- the right to request flexible working hours 
- time off for emergencies, such as a child falling ill 
- statutory sick pay for when you’re unable to work due to illness 
- statutory maternity, paternity and adoption leave and pay 
- minimum notice periods if your employment is terminated 
- protection against unfair dismissal 
- statutory redundancy pay 
As well as the statutory rights, and employee may be able to negotiate salary rates, benefits in kind, company shares and bonuses. 
These statements usually apply to an employee: 
 
- regular working hours 
- holiday pay entitlement 
- a line manager responsible for allocating them work 
- to be able to join the company pension scheme 
- company disciplinary procedure applies 
- work from the business premises 
- provided with materials, tools and equipment necessary to work 
- this is their main job, if they do have a second job it’s in a completely different type of business 
 
It is important to establish the difference between a company employee and a contractor, as IR35 tax laws apply here. If you require IR35 advice and employee contract reviews, contact us and we’ll help you through the required compliancy. 
 
 
 
 
Written by 
 
Nicola J Sorrell 
- Effective Accounting 
 
Founder | Xero Champion | IR35 Expert 
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