Does a director have to be a shareholder?

No, a person does not need to be a shareholder to be a director of a limited company. There’s no legal requirement linking the two roles. Nevertheless, there are very good reasons why directors may also be shareholders, particularly in start-up companies.  

As you work through the limited company formation process, you’re required to appoint people to various roles in the company. Among other things, you will need to appoint directors and identify who the shareholders will be.

You may wonder whether a person can hold both roles, or even whether directors are required to be shareholders in the company. 

In this article, we will explain why you may choose to be a director and a shareholder. We’ll clarify the differences between these roles and explain the benefits to you and your business of taking on both roles.  

Does a director have to be a shareholder?

The short answer is no. There is no requirement under the Companies Act 2006 for a person to be a shareholder before they are eligible to be a director (and vice versa).

Can the same person be both a director and a shareholder?

Yes, the same person may be appointed to be a shareholder and a director.

When you set up your company, whether you are applying directly or through a company formation agent, you must appoint at least one director and at least one shareholder.

These can be separate individuals. Or, if you’re just starting out in business by yourself, you can be the sole shareholder and the sole director.

It is very common for companies to have at least one person who is both a shareholder and a director. In fact, a recent survey estimated that almost 88% of UK companies have this set up.

Why do so many businesses have director shareholders?

The director shareholder (or owner-managed) structure works well for many new businesses.

Motivation to increase the value of the company

Directors who also hold shares in the company are motivated to work hard to increase the company’s value. The more profit the company makes, the more you are likely to receive in dividends. Every shareholder has an interest in making the company as successful and profitable as possible.

In exchange, shareholders get to enjoy certain rights. As mentioned, the actual rights can differ depending on the particulars (or “rights”) attached to those shares. The particulars are usually outlined in the articles of association or shareholders’ agreement (if there is one).

Tax efficiency

Director shareholders can benefit from blended remuneration of a salary, bonuses, and dividends. This results in more take-home pay as dividends are taxed at a lower rate.

We explain more about the tax benefits below.

How do shareholders get paid?

Shareholders get paid through dividends. These are direct cash payments from the profit that the company makes.

It can take a while for new businesses and start-ups to make a profit. Even if the company does make a profit, dividend payments are not automatic. They must first be authorised by the directors, and directors may choose to reinvest profits back into the business before paying a dividend.

With that in mind, it can take a few years before shareholders are paid dividends. However, as the company grows, members share in that growth and receive increasing amounts in dividends as the business becomes successful.

How do directors get paid?

Directors are usually paid a salary, and they may receive bonuses for performance. 

If you are a director, you can only receive dividends if you’re also a shareholder. This is one of the main reasons why directors in a company are also shareholders. Being a shareholder means that you can structure your remuneration in a more tax-efficient manner.  

Tax considerations if you’re a shareholder and a director

Director shareholders often take a low salary. Usually, that’s around £12,750 to max out the personal allowance. This way, you minimise your National Insurance contributions while still qualifying for state pension contributions. 

The rest of your remuneration is taken as dividends, which are taxed at a lower rate than income. The rate at which dividends are taxed are: 

• Basic rate: 10.75% 
• Higher rate: 35.75%  
• Additional rate: 39.35%  

There’s also a tax-free dividend allowance of £500 per year. In other words, you can earn up to £500 in dividend income from shares without paying any tax, and this is entirely separate from your standard £12,570 personal allowance. 

We recommend that you speak to an accountant to help you structure your remuneration in the most tax-efficient way.  

What is a shareholder qualification clause?

A shareholder qualification clause is a clause in the company’s articles of association that makes it compulsory for a director to hold shares in the company. This is quite common in property management companies (for example) and means that, if a person does not hold shares in the company, they cannot be appointed as director.  

If you’re adopting the Model articles when you incorporate your company (as most new companies do), you’ll see that there is no such clause in them. You would have to draft bespoke articles of association to include it. 

What is the difference between a director and a shareholder?

Shareholders own a portion of the company. Also known as ‘members’, shareholders invest money into the business and, in return for their investment, they are issued a certain number of shares. 

Directors manage the day-to-day affairs of the company. They are responsible for acting in the best interests of the company and making sure that the company is compliant with all laws and regulations.  

What rights and responsibilities do shareholders have?

Rights and responsibilities can vary between companies and between different classes of shares. However, in general terms, holding a share will usually entitle the shareholder to the following rights: 

• Voting rights: A shareholder typically has the right to attend the company’s general meetings and to vote on shareholder resolutions, with one vote per share. The more votes they have vis-à-vis other shareholders, the more influence they have on the company. 
• Dividend rights: Shareholders are usually entitled to receive any dividends paid by the company, in proportion to their holdings. 
• Capital distribution rights: Shareholders will also normally have the right to participate in any capital distributions the company makes. For example, on the winding up of the company. The extent of their participation is often dependent on the proportion of their shareholding.

What are the duties of a company director?

Directors have a general duty to manage the business’s day-to-day affairs in good faith. On top of this, they hold several statutory responsibilities including, but not limited to: 

• Filing the annual confirmation statement 
• Filing annual accounts (even if the company is dormant) 
• Filing a tax return and paying Corporation Tax 
• Filing a VAT return and paying VAT (if applicable) 
• Managing changes to the company’s officers and updating their details 
• Managing changes to the company’s registered address 
• Registering charges (security given for a loan, e.g. mortgage) 

Directors are also responsible for ensuring the company complies with all other relevant legislation. This can be anything from health and safety laws to product safety laws. 

Additionally, in everything they do, directors must comply with the statutory director duties in sections 171-177 of the Companies Act 2006. This includes the duties to act within their powers or exercise independent judgment. 

Which structure is right for your company?

An owner-managed structure is ideal for start-ups and family businesses. It allows you to retain full control of the company and make decisions freely.  

You may also find that this structure helps you to attract talented employees without offering huge salaries. By granting shares, you give employees a benefit and an incentive to work hard, and keep them fully invested in the company’s growth. 

If you are setting up your limited company and want to get the structure right from the start, visit the 1st Formations homepage to explore our formation packages and expert support.