By Karina Job 

Do either of these scenarios sound familiar to you?

1. Joe has decided to set up a company to operate his courier business. Joe is a young single guy and he does not have a business partner. Joe decides to be the sole director and shareholder of the company and he is also the company's sole employee.

2.    Jim and Mary operate a dairy milking business through a company of which they are the joint directors and shareholders. The business also operates from their farm. Jim largely runs the business and Mary has a part time job in banking. This means Mary is absent from the farm during the day and is not actively involved with the day to day running of the business.       

These two scenarios are very common in New Zealand as most New Zealand companies are small closely held companies. Because of this, often the lines between acting as a director, shareholder and employee can be blurred. However, the rights and obligations of directors and shareholders are very different and you should be familiar with these before consenting to act as a director or shareholder of a company.

So what is the difference between a director and a shareholder?

Directors are responsible for making the day-to-day decisions that affect the company and so are effectively in "control" of the company. 

This means that the legal obligations of directors are more onerous than the legal obligations of shareholders. Directors also owe duties to the company, to its shareholders and to others dealing with the company. They must act in what they believe to be in the best interests of the company and with such care as may reasonably be expected of them in all the circumstances.

The duty of care directors owe to the company, its shareholders and others is a burden which should not be taken lightly and directors should become familiar with their duties under the law. It is important that a director does not adopt a passive role but instead is actively involved with the management of the company.

On the other hand, shareholders are investors in a company. They pay money into the company in return for shares.

The names of all the shareholders will be entered on the company's share register as being the holder at that time of one or more shares in the company.

Unlike directors, shareholders do not have day to day control of the company, although shareholders do have voting rights, and in particular the law prescribes that certain powers must be exercised only by the shareholders of a company. These powers include:

• Ø adopting, altering or revoking a constitution
• Ø altering shareholder rights
• Ø approving a major financial transaction
• Ø appointing and removing directors
• Ø approving an amalgamation
• Ø putting the company into liquidation; and
• Ø the appointment and removal of directors

It is important that if you consent to being a director AND a shareholder of a company that you recognise that you are wearing two different hats and accordingly have different rights and obligations.

If you are unsure or uncomfortable with any aspect of the company, don't rely on assurances from co-directors (including your spouse) but instead make your own enquiries. If you don't understand seek professional advice.