When founding a company, it is common to also elect yourself as a director and shareholder of that company. Being a founder, a director and a shareholder are not all the same thing. You need to distinguish between each of your roles, as each position comes with different rights and responsibilities. You have to be careful to avoid mistakenly not comply with your duties in one capacity because you were thinking of another. If this occurs, there may be consequences. This article explains:
- the differences between being a founder, director and shareholder; and
- issues to look out for if you are one, both or all three.
If you do not run your business through a company, these concepts are not relevant to you.
I Am a Founder, Director and Shareholder in a Company
It is common for a founder of a company to be a director and shareholder of that company. Even if you are not the founder of a company, you may be a director and a shareholder. Each of these roles comes with different rights and responsibilities. If you fail to comply with your responsibilities while performing a role, then you risk:
- an individual or company bringing legal action against you;
- receiving a fine; or
- potentially ending up in jail.
These risks are all significant. Therefore, it is essential to know what is expected of you in each of your roles. You have duties not only to your company but to other key stakeholders.
What Are the Differences Between the Different Roles?
Founder
| How Do You Get This Role? | If you start a business
alone, with a partner or with a team of people, you will likely be
considered a founder.
Importantly, being a founder is not a legal concept. There is no law to say that you are or are not the founder of a business. It is up to you and the people who call themselves 'founders'. You do not necessarily have to invest in your company to be a founder. However, founders will often have lent money to their company or have bought shares in the company to get it up and running. |
| What Rights Do I Have? |
Being a company founder does not automatically mean you have any rights in respect of your company. However, you may have been given rights by your company's shareholders or directors as a founder. For example, shareholders often agree that founders have a right to appoint a director in their shareholders agreement. |
| Do I Get Paid For My Role? | As a founder, you may be an employee of your company. If you are, you are entitled to receive payment of at least the minimum wage. Often founders will choose to receive their salary in the form of company shares rather than cash. However, be wary, as this may have adverse tax consequences. If you are a startup founder, you may be entitled to pay under New Zealand employment law. |
| What are my Responsibilities? |
A founder is not a legal concept. Therefore, you do not have any legal responsibilities as a founder unless you have agreed to specific responsibilities in your capacity, for example, within the shareholders agreement. However, this would be unusual. |
Director
| How Do You Get This Role? | You can be appointed as a director, either by shareholders in the company or the other directors. Your company's constitution or shareholders agreement will outline the process. You must give a signed piece of paper saying that you consent to act as a company director. |
| What Rights Do I Have? |
As a director, you have the right to make business decisions on behalf of the company. However, you may need to agree with some, or all, of the other directors for the more important decisions. To work out how many directors need to agree on a decision, look through your company's constitution or shareholders agreement. If your company does not have a constitution or shareholders agreement, you will need to refer to the Companies Act. It is also likely that you will have the right to determine who becomes a shareholder in the company. |
| Do I Get Paid For My Role? | As a director, you may receive payment for your role. Generally, the shareholders will decide the amount or approve the amount proposed by you or the other directors. However, if you are also a founder working in the business, you would generally not receive both a salary and a directors fee. |
| What are my Responsibilities? |
If you are a director, you will have several responsibilities. The most important of these are your directors duties. The primary duties for directors are to:
If a director fails to fulfil their duties or acts dishonestly, the director may be personally responsible for significant penalties. |
Shareholder
| How Do You Get This Role? | You become a shareholder in a company if you buy shares in the company. This includes any shares you purchase when the company is first set up. You will be a shareholder in the company until you sell or surrender all of your shares. |
| What Rights Do I Have? |
Whilst the directors control the day to day running of the company, shareholders have some of the most important decisions. These include the decision to remove directors in some cases, change the rights attaching to shares or wind up the company. You may also have the right to share in the profit that the company makes. |
| Do I Get Paid For My Role? | You do not get paid for your role as a shareholder. However, you may be entitled to receive payments on your shares in the form of dividends if the company makes a profit. |
| What are my Responsibilities? |
As a shareholder, you do not have any significant responsibilities to the company unless your company's constitution or shareholders agreement says otherwise. Shareholders must act under the lawful decisions of directors and make decisions promptly and in good faith. Additionally, your liability as a shareholder is limited to any amount you have not yet paid for your shares. For example, if you received shares worth $1,000.00 but only paid $1.00, you have a $999.00 liability to the company. You have no other liabilities, meaning that you are not responsible for the company's debts. |
When Should I Be Careful About My Different Roles?
For the most part, acting in your different roles should not cause problems. However, there are some situations in which:
- a conflict of interest may arise; or
- you may be at risk of breaching your responsibilities.
Below, this article outlines examples of situations where you should be particularly careful.
Making a Decision About High-Risk Business Transactions
As a founder, it may be tempting to make risky decisions on behalf of your company which you believe could have significant benefits down the line. However, as a director, you can only make decisions if you think those decisions are in the best interests of the company. If the chance of pay-off is too low, a high-risk decision may not be in the best interests of the company.
Making Decisions Which Affect Current Shareholders' Shareholding in the Company
One way to raise money for your company is by issuing shares to new investors. As a director, this decision may be in the best interests of the company. However, as a shareholder, you may not be happy about the company issuing new shares. This is because new shares will reduce your percentage ownership of the company. Even in this situation, you must act in the best interest of the company, not in your best interest personally as a shareholder.
Choosing Who Makes Decisions on Behalf of the Company
As a founder, you may want to retain full control of your company and all decision making powers. However, as your company grows, you may not have the level of expertise required to run your company as well as your shareholders would like. There may come the point where it would be in the best interests of the company to appoint another director to the board who has the required expertise. As a founder, you may not want this. However, your directors' duties are the most important. You must always ensure that you are acting in the best interests of the company.
Choosing Who Cannot Make Decisions on Behalf of the Company
It may no longer be in the best interests of the company for a director to stay on if they have:
- consistently displayed poor decision-making abilities;
- failed to show up to board meetings; or
- they become incapacitated in some way.
If this is the case, your company can remove them as director.
This applies even if that director is your partner, your friend or even you. If you do not remove yourself, your company's shareholders may do it themselves.
Key Takeaways
As a founder, you do not automatically have any legal rights in respect of your company. If you are a director of your company, you must always act in the best interests of your company. This duty applies even if it affects you negatively as a founder or a shareholder. If you are a director of your company and have a personal interest in a matter, you must disclose it to the other directors.
