Why is Shareholders or Members important for a Limited Company?
For those who are not familiar with businesses, they might think that the Board of Directors are the most important person within an entity because they are normally responsible for the operations and day-to-day decision making.
However, what these people do not realise is that the actual owner behind an entity is actually the shareholders – people who invest in an entity for it to run its business and attain its goal. The Company is also liable to repay these people dividends for the capital injected.
For SMEs, the director and shareholder are normally the same person. Hence, the misinterpretation amongst non-business owners. Despite being the same person, their roles and function within a Company is different. In laymen’s term, directors are those who manage the business operation whilst a shareholder is the owner of said business and own the profit earned by the Company.
A shareholder is an important part of an entity because:
Even though board of directors are appointed by the shareholders to manage the business and make a decision on a daily basis, shareholders have the ultimate power to object a decision made if they feel such proposal is not profitable for the Company in the long run.
Hence, the board of directors are normally under constant pressure to ensure all decisions made meet the targeted profit for the quarter or year.
Financing the Company
As the owner, shareholders are liable to inject capital into the business whenever board directors deemed it necessary. The board of directors may write up a proposal on why there is a need to increase such capital and how the injected capital will in return generate into profit.
The profit generated will then be issued as dividends to pay back the shareholders according to the percentage of their shares within the Company.
Control over the business entity
Shareholders have the power to appoint who they deemed skilful and knowledgeable to be in charge of the Company’s operation activities. If the person in charge made a blunt and result to decline in profit, the shareholder will also be liable towards the result. Other shareholders have the right to raise comments and questions during quarter or annual meetings.