The owners of a corporation are most commonly called shareholders or stockholders. They represent the individuals or entities that hold equity in the business. Unlike a sole proprietorship or a partnership, corporate ownership is a distinct legal concept where owners often do not manage the business. This structure allows the corporation to raise substantial capital by selling fractional ownership claims while providing owners with limited liability.
The Primary Term for Corporate Owners
The terms “shareholder” and “stockholder” are generally interchangeable, referring to the owner of shares or stock in a corporation. A share represents a fractional ownership claim on the company’s assets and earnings. In common business language, both terms describe the same position of equity ownership.
The corporation’s capital structure involves different categories of stock. Authorized shares are the maximum number of shares a company is legally permitted to issue, as set in its corporate charter. Issued shares are the portion of authorized shares sold or distributed to investors. Outstanding shares are the issued shares currently held by all investors, excluding any shares the company holds as treasury stock.
Separating Ownership from Management
The corporate structure is characterized by the separation of ownership from the daily operational control of the business, especially in large public companies. Shareholders delegate the responsibility of running the company to a professional management team. This separation allows the company to benefit from specialized expertise while accessing capital from a broad investor base.
The formal hierarchy starts with shareholders, who elect the Board of Directors to represent their interests. The board is responsible for corporate governance, setting high-level strategy, and monitoring executive performance. The board then appoints corporate Officers, such as the CEO and CFO, who handle day-to-day operations and tactical decision-making. Shareholders exercise control primarily through their voting power to elect and remove directors.
Core Rights and Powers of Shareholders
Shareholders possess specific rights that define their ownership role. The most significant power is the voting right, which involves electing the Board of Directors at the annual meeting. Shareholders also vote on proposals for fundamental changes, such as approving major mergers or amendments to the corporate charter.
Shareholders also have financial rights related to the company’s profits. This includes the right to receive dividends, if the Board of Directors formally declares them. Dividends are a portion of the company’s earnings distributed to owners, determined by the board’s discretion, and are not guaranteed.
A shareholder possesses a residual claim on the company’s assets if the company is liquidated. Common shareholders are last in line to receive proceeds, paid only after all creditors, bondholders, and preferred shareholders have had their claims satisfied. This right means a share represents a claim on the company’s equity remaining after all liabilities are accounted for.
Variations in Corporate Ownership Classes
Ownership rights vary significantly depending on the class of stock held, primarily common stock and preferred stock. Common stockholders are the most numerous type of owner and generally have the power to vote on corporate matters, giving them a direct say in governance. Their return is tied to potential stock price growth, and their dividend payments are variable and not guaranteed.
Preferred stockholders typically do not have voting rights. Their main advantage is priority over common stockholders in receiving dividend payments and receiving a payout during liquidation. Preferred stock often pays a fixed, regular dividend, making it similar to a bond for investors seeking stable income.
In a liquidation scenario, preferred shareholders are paid out from remaining assets before funds are distributed to common shareholders. This preferential treatment makes preferred stock a less volatile investment, though it often limits the potential for long-term capital appreciation seen in common stock.
Ownership in Public vs. Private Corporations
The nature of being a shareholder differs significantly between public and private corporations. A private corporation is owned by a select group of investors, often including founders, management, and private equity firms. Shares are not traded on a public stock exchange, meaning the number of owners is small and closely held.
Shares of a private corporation are considered illiquid because selling them requires finding a willing buyer within that limited circle. In contrast, a public corporation has sold ownership to the general public via an initial public offering (IPO), and its shares trade freely on a stock exchange. This results in a broad ownership base with high liquidity. The public nature also subjects the company to strict regulatory and reporting requirements, providing high financial transparency.