Shareholder

Shareholder (Stockholder): Definition, Rights, and Types

A shareholder is a person, company, or institution that owns one or more shares of a company’s stock or a mutual fund. Shareholders jointly own the company in proportion to their holdings and participate in its financial outcomes: gains through stock price appreciation and dividends, or losses if the company declines.

Key takeaways

• A shareholder can own as little as one share.
• Shareholders can earn capital gains or losses and may receive taxable dividends.
• Shareholders have voting and inspection rights but limited liability for corporate debts.
• Common shareholders are last in line for company assets on liquidation; preferred shareholders have priority for dividends and payouts.
• Ownership can be classified as majority (over 50% of voting shares) or minority (less than 50%).

What a shareholder does and when they benefit

Shareholders benefit when the company’s market value rises or when the company pays dividends. They also influence governance by voting on matters such as board election, major mergers, and other corporate decisions. However, shareholders can lose some or all of their investment if the company underperforms or goes bankrupt.

Majority vs. minority shareholders

• Majority shareholder: Owns and controls more than 50% of outstanding voting shares. Often founders or their descendants. Can exert strong influence over board composition and major corporate decisions.
• Minority shareholder: Holds less than 50% of voting shares and typically lacks unilateral control.

Rights of shareholders

Common rights granted by corporate charter and bylaws typically include:
* Voting on key matters (board members, mergers, charter changes).
* Inspecting corporate books and records.
* Receiving dividends if declared by the board.
* Attending annual meetings or participating by proxy (mail or electronic voting).
* Suing the company for wrongdoing by directors or officers (derivative suits).
* Claiming a proportional share of remaining assets if the company liquidates (after creditors and preferred shareholders are paid).

Types of shareholders and share classes

• Common shareholders: Usually have voting rights and potential for capital appreciation. Last in priority for liquidation proceeds.
• Preferred shareholders: Usually have limited or no voting rights but receive fixed dividends and priority claim on assets over common shareholders.
• Share classes: Companies may issue multiple classes (Class A, Class B, etc.) with different voting powers—for example, one class may carry 10 votes per share while another carries one vote.

Tax implications

• Capital gains or losses from selling shares must be reported on personal tax returns.
• Dividends received are generally taxable income.
• Corporate structure affects taxation:
• C corporations: Corporate profits are taxed at the entity level and again at the shareholder level when dividends are distributed (double taxation).
• S corporations: Pass-through taxation—profits and losses flow to shareholders’ personal tax returns, avoiding most double taxation, subject to eligibility rules.

Limited liability and liquidation priority

Shareholders are not personally liable for corporate debts; creditors cannot seize a shareholder’s personal assets to satisfy company obligations. In liquidation, the payment order typically is:
1. Creditors and bondholders
2. Preferred shareholders
3. Common shareholders (may receive nothing if assets are insufficient)

How to become a shareholder

Anyone can become a shareholder by purchasing shares through a brokerage, participating in an initial public offering (IPO), or receiving shares via employee stock plans or private transactions.

Bottom line

Shareholders are owners of a corporation with rights to vote, inspect records, receive dividends when declared, and share in residual assets after obligations are met. Ownership carries both potential rewards and risks—including loss of the entire investment—so investors should understand share types, voting power, tax consequences, and their position in the liquidation priority before investing.