Definition: Shareholders, often called stockholders, are the owners of a corporation. Shareholders are the people or entities that legally own the stock certificates for a corporation. When a business incorporates, it files a corporate charter with the state government. The charter sets up all of the rules, bylaws, and stock information for the new company.
One of the most important sections of the corporate charter lists the number of shares that are authorized as well as the par value of each share. Not all companies are required to set a par value, but most do for a variety of reasons.
When the newly formed corporation issues shares to investors, these investors become shareholders. These issued shares are recorded in the common stock equity account on the balance sheet. Most balance sheets list out the number of shares outstanding as well as the total number of shares that are authorized.
Corporations typically do not issue all other their authorized shares at once. Usually a significant portion of authorized shares stay unissued. This ensures the company will be able to raise capital by equity financing.
There can be several different classes of shareholders and each class has it’s own rights. Common shareholders have an equity stake in the business as well as a voting right equal to their percentage of ownership. Common shareholders elect the board of directors who in turn appoint the executives to run the company.
Preferred shareholders, on the other hand, don’t typically have voting rights. Instead, they maintain the preferred right to dividends that are issued.
C corporations can have many different types of shareholders. For example, individuals, LLCs, and corporations can all be shareholders in a C corporation. A corporation organized under sub-chapter S, also called an S corporation, is very limited in the types of shareholders that are allowed. S corporations are not allowed to have corporate, partnership, or non-resident alien shareholders.