Corporate Social Responsibility (CSR) – Do the Shareholders Own a Company?
Do the shareholders own a company?
Yes or NO.
If one poses the question, “Do the shareholders own a company (incorporate entity)” the most likely answer is “Yes”. This is however not correct. Whilst the shareholders, and usually just the major shareholder, control the company through their power to elect the board of directors, they do not own the company. The obvious question is therefore, “If the shareholders don’t own a company then who does?” Would it surprise you to hear “Nobody”?
Nobody? How can this be?
A company has artificial personality. That is, the law recognized the incorporated entity has legal personality. It may contract, sue and be sued in its own right. As it is artificial however it cannot speak and think like a human being as a result it requires real people to speak and think on its behalf. Those humans are the directors of the company and they legally and effectively control the operations of the company.
What evidence is there for this contention?
Limited Liability
Shareholders are not responsible for the debts of a company as opposed to an owner who has unlimited liability. Directors however in some circumstances such as trading whilst insolvent, may have personal liability for the debts of a company.
Balance Sheet
On a balance sheet Stockholders Equity is on the liabilities side of the ledger. The same as debt or bank loans. The rationale for this is that it is a special form of debt, which has no legal liability to be repaid. It is a debt to the shareholders nevertheless. That means it is not considered a liability for accounting purposes.
Accounting Treatment
When profits are recorded they are posted to the Stockholders Equity account, however as a separate item called Current Earnings, Undistributed Profits or Retained Earnings. When and if a dividend is declared the distribution is made by debiting retained earnings account and crediting the bank account in the Companies books. If there is no profit or retained earnings (profits from previous periods) then no dividend may be made.
Owners Equity
Some small businesses books of accounts refer to capital as “Owners ” Equity. This applies only to sole traders and partnerships, not to incorporated bodies. This term is for simplification and serves to add to the confusion rather than clarify. I would suggest that an owner may take his equity out at any time, a shareholder may not.
Return of Capital (Buy-Back)
By law, dividends may not be paid out of capital. Dividends are a distribution of profits. To return capital to shareholders, usually referred to as a buy-back, the company must seek court approval to do so whereas an owner may withdraw his capital at any time.
Summary
Nobody owns an incorporated company. Companies have personality and like real persons they are not owned by anybody. The directors of the company control the company. The shareholders control who will sit on the board of directors of the company. Shareholders cannot be held liable 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 court order is required to return capital to shareholders.