Do shareholders own a company?
Yes or no.
If one asks the question, “Do shareholders own a company (incorporated entity)?”, the most likely answer is “Yes.” However, this is not correct. While the shareholders, and usually only the majority shareholder, control the company through their power to elect the board of directors, they do not own the company. Therefore, the obvious question is: “If shareholders don’t own a company, who does?” Would you be surprised to hear “Nobody”?
Nobody? How can this be?
A company has artificial personality. In other words, the law recognizes that the constituted entity has legal personality. You can hire, sue, and be sued in your own right. However, since he is artificial, he cannot speak or think like a human, thus requiring real people to speak and think on his behalf. Those humans are the directors of the company and legally and effectively control the operations of the company.
What evidence is there for this claim?
Shareholders are not liable for a company’s debts unlike an owner who has unlimited liability. However, directors in some circumstances, such as dealing while insolvent, may have personal liability for a company’s debts.
On a balance sheet, stockholders’ equity is on the liabilities side of the general ledger. The same as debt or bank loans. The reason for this is that it is a special form of debt, which is not legally required to be repaid. However, it is a debt to the shareholders. That means it is not considered a liability for accounting purposes.
When profit is recorded, it is recorded in the stockholders’ equity account, however, as a separate item called current earnings, Undistributed Profits or Retained Profits. When and if a dividend is declared, the distribution is made by debiting the retained earnings account and crediting the bank account on the Company’s books. If there are no earnings or retained earnings (earnings from prior periods), then no dividends can be made.
Some small business ledgers refer to capital as “owners” equity. This applies only to sole traders and partnerships, not to incorporated entities. This term is for simplicity and serves to add to confusion rather than clarify. I would suggest that an owner can take equity out of it at any time, a shareholder cannot.
Return of capital (repurchase)
By law, dividends cannot be paid out of capital. Dividends are a distribution of profits. In order to return capital to shareholders, generally known as a buyback, the company must seek court approval to do so, while an owner can withdraw his capital at any time.
No one owns an incorporated company. Companies have personality and, like real people, they are not owned by anyone. The directors of the company control the company. Shareholders control who will sit on the company’s board of directors. Shareholders cannot be held responsible for the debts of a company. Shareholders receive a dividend only when the company makes a profit and then only if the directors decide to declare a dividend. A short order is required to return capital to shareholders.