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What's the Difference Between Directors, Shareholders and Employees in a Small Corporation?

This week’s question from our portal “Ask Us Anything” comes from someone who wishes to remain anonymous.

I plan to start a new company by myself, and I am not sure about the differences between a Director and a Shareholder. What’s the difference between these roles and a regular employee, and does this difference really matter?

Good question! This one comes up a lot for new business owners because they were never taught the important difference between the three roles.

Knowing the difference between when you are playing the role of a director vs. shareholder vs. employee can also help you plan out a solid tax strategy for your business. 

Directors are individuals responsible for the overall management and strategic decision-making of the corporation. They’re the guiding force, making day-to-day business decisions that move the business forward – such as hiring, firing, money management, purchasing equipment/inventory, and general management.

In large companies, the board of directors is usually focused on making decisions around major business strategies, financial management, and compliance with legal and regulatory requirements. These directors are almost like politicians, in that they are elected representatives of a group of shareholders that have voted the directors into a board position.

In a small company, the directors are usually the ones that are actually working in the business and keeping the ‘trains running on time’.

Directors are typically elected by shareholders, and they bear legal responsibility for the company’s actions.

Shareholders, often known as owners or stockholders, are people who hold shares (equity) in the corporation. Shareholders are nothing more than investors. They don’t actually have an active role in the business and they cannot make day-to-day business decisions like a Director can.

Employees are the individuals hired by the corporation to execute its day-to-day operations. They fill various roles within the company, from entry-level to managerial positions, and their responsibilities span the gamut of daily tasks necessary to keep the business running. Employees typically report to the directors or officers of the company. The number of employees can vary significantly depending on the size and nature of the business, and it’s the directors and officers who handle the hiring and management of employees.

In the context of a small corporation, it’s important to recognize that individuals can occupy multiple roles simultaneously. For instance, a director may also be a shareholder and an employee, which is common in closely-held or family-owned businesses. Understanding the unique roles and responsibilities of each group is essential for maintaining transparency, accountability, and efficient management within your corporation.

Should you have more questions or require further clarification, please don’t hesitate to ask. I’m here to assist you!

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