What is a Shareholder or Stockholder of a Corporation?

Shareholders or Stockholders of a Corporation
Shareholders or Stockholders of a Corporation. Thomas Lai Yin Tang/Getty Images

Corporations are unique business entities because they are owned by a group of people who own the business, buy shares of stock in the business, and who then (in many cases) sit back and watch to see if their shares grow. This article discusses shareholders and stockholders and their unique tax situation. 

Shareholders and stockholders are basically the same thing. They both describe someone who owns shares of stock in a business.

For the purposes of this article, we'll use the term "shareholders." 

Shareholders are individuals, companies, or trusts, that own shares of a for-profit corporation. The individuals own a specific number of shares, which they each purchased at a specific price.

The stockholders have invested their money to purchase these shares and they gain in two ways

  • Through dividends paid based on the number of shares owned by the shareholder, and due to the corporation's profits, and
  • By selling their shares at a profit.

Shareholders and the Annual Meeting

One of the most interesting things about being a shareholder of a corporation is that you have the right to attend the annual meeting. Even if you have only one share in a company, you can go to this meeting. Probably the most well-known corporate annual meeting is held by Berkshire Hathaway, whose chairman, Warren Buffett, holds a lively and interesting session every year.

 

Shareholders in Public Corporations vs. Closely Held Corporations

Most small corporations are closely held. That is, they have a few shareholders, most of whom know each other and in many cases these shareholders are from the same family or have other business or personal relationships. 

In a publicly held corporation, there can be millions of shareholders.

and millions of shares held. 

Different Types of Shareholders

Large corporations have different types of shareholders and types of stock that they own. Usually a corporation will start out with common stock. Shareholders holding common stock have voting rights (one vote per share), they get dividends when the corporation pays them, and they can sell their shares for a profit (or a loss). 

Some companies also have preferred stock and shareholders. Dividends must be paid to these shareholders before they are paid to common stock owners, but these shareholders do not have voting rights. Preferred shares are like a hybrid, with characteristics of both stocks and bonds. 

Because common stock shareholders are taking a bigger risk, because they can lose their investment. 

Which Shareholders are in Control? 

A shareholder has controlling interest in a corporation if the shareholder has a majority of the voting shares of stock in that corporation. Having controlling interest means that the owner of the controlling shares can control any decision made by the shareholders and override any other shareholder opinions or votes. Depending on the bylaws of the corporation, a two-thirds interest may be required to pass any motion.

In this case, controlling interest would be 34 percent of the votes (preventing two-thirds vote by any other person or group).  

Different Types of Investors in a Corporation

In addition to the shareholders, there are others who have a stake in the success of the corporation. This other type of investor consists of bond-holder, who are to whom the corporation owes money. 

These two types of investors are: 

  • Equity (ownership) investors, who own shares in the company, and 
  • Debt investors, who buy corporate bonds, which pay a fixed return on their investment. 

Shareholders and Double Taxes

For years there has been discussion about the perceived unfairness of what is called "double taxation" on corporate shareholders. Briefly, double taxation, as imposed by the IRS, is first a tax on the earnings of the corporation, then a tax on those earnings distributed to shareholders as dividends.

 

If the corporation decides not to pay dividends, and instead reinvests the corporation's profits in growth (this is called retained earnings), no dividends are paid, and no taxes on those dividends. 

Shareholders in small, closely-held businesses typically do not receive dividends. Many of these individuals work in the company as employees, and they pay taxes on their employment income. 

Shareholders in a Corporate Bankruptcy

The rights of the shareholders are subordinated (placed under) the rights of bond-holders, so that shareholders lose the value of their shares if the corporation becomes bankrupt. Shareholders may also lose some or all of the value of their shares if the stock price is lower when they sell than the price when they bought.