One of the most common areas of confusion when setting up or managing a limited company is understanding the difference between directors and shareholders.
What is the difference between directors and shareholders?
While the roles of Directors and Shareholders can overlap, they each have distinct responsibilities and rights within a company. In this article, we’ll break down the key differences and how they impact business management and taxation.
Matt explains more in his latest video:
Directors: Running the company
Directors are responsible for managing the company’s day-to-day operations and making key business decisions. Their primary role is to act in the best interests of the company and its shareholders.
Key responsibilities of directors:
- Ensuring the company complies with legal and regulatory requirements.
- Filing annual accounts and tax returns with Companies House and HMRC.
- Managing company finances, including payroll and tax obligations.
- Acting with integrity and making decisions that benefit the company.
How directors are paid:
Directors can receive a salary through PAYE, just like employees. This means they will pay Income Tax and National Insurance Contributions (NICs) on their earnings. Many directors choose to take a combination of salary and dividends to maximise tax efficiency.
Shareholders: Owners of the company
Shareholders (also known as members) are the owners of the company. They invest capital in return for shares, which entitle them to a portion of the company’s profits.
Key rights of shareholders:
- Receiving dividends when the company distributes profits.
- Voting on key business decisions at shareholder meetings.
- Approving or rejecting major changes, such as appointing new directors or selling the company.
How shareholders are paid:
Unlike directors, shareholders do not receive a salary. Instead, they earn money through dividends, which are paid from the company’s post-tax profits. Dividends are subject to Dividend Tax but are usually taxed at a lower rate than a salary.
Can you be both a director and a shareholder?
Yes, in many small businesses and limited companies, the same person is both a director and a shareholder. This means they are responsible for running the company while also benefiting from its financial success. However, it’s important to remember that these roles have different legal and tax implications.
Tax planning tip:
If you are both a director and a shareholder, you may be able to structure your income to minimise tax. Many directors take a low salary (to reduce NICs) and top up their income with dividends, which are taxed at a lower rate. However, tax laws change frequently, so it’s always best to seek professional advice.
Key takeaways:
Understanding the difference between directors and shareholders is crucial for effective business management and tax planning. Directors manage the company, while shareholders own it and benefit from its profits. By structuring your income wisely, you can optimise tax efficiency while ensuring compliance with legal obligations.
At QPS, we help company directors navigate tax planning, compliance, and payroll with ease. If you need expert advice on structuring your business income, get in touch with us today.
