- Introduction
- What is share?
- Who is a shareholder?
- Advantages of Having Wide Range of Shareholders
Private limited liability companies and public limited liability companies are companies that do have shareholders but only public limited liability company is allowed to have wide range of shareholders. Shareholders are the owners of a company. Private companies have few shareholders — the promoters and few other investors. Going public creates room for a company to have wide range of shareholders. In that sense, the advantages of having wide range of shareholders is only applicable to a public limited liability company.
What is share?
A share is a unit of a company’s capital. Bundle or mass of shares is called stock. There are three major classes of a company’s shares. They are: founders shares, ordinary shares or equities, and preferred shares.
Who is a Shareholder?
A shareholder of a company is one who holds or owns units of a company’s capital. As there are categories of shares, so there are categories of shareholders — founders, ordinary shareholders or common stockholders, and preferred shareholders.
Advantages of Having Wide Range of Shareholders in a Company
1. It creates a large pool of fund for the company
A company can easily raise long-term capital through securities than through borrowing. Common stock is the cheapest source of capital for large corporations, and it’s also non-refundable.
2. Growth and Expansion
Company which is owned by few individuals may find it difficult to grow and expand due lack of much resources. To surmount such constraints, the business owners offer some fragment of the ownership of the company to the public in exchange for fund.
3. Guarantees Perpetuity of the company
As the saying goes that “a company does not die but can only be killed," companies that have single or few shareholders can easily be killed by decision of one majority shareholder. But company with many shareholders without any single majority can’t easily be killed as the shareholders will block any activity that can lead to winding up of the business or any hostile takeover. Instead of winding up the company the shareholders may ask the management to consider a merger with another company.
4. It makes for wide consultation in decision making process
In a publicly funded company, management can’t unilaterally take some critical decisions without first consulting and getting clearance from the shareholders. Having wide range of shareholders leads to dilution. It dilutes ownership of the promoters/ founders of the company, thereby reducing their powers in decision making.
5. It enhances prudence in management of the company
Widely held companies usually have corporate governance policies that determine the composition of boards and committees, ethics etc. The board of directors and management are often under pressure to deliver on profit expectations, and if they fail to achieve profit targets or if the company's shares go down below the average market prices, the shareholders would vote for their removal.
6. Risk sharing
Every business enterprise is faced with many risks. These are bore by the shareholders in anytime they occur. Having too many shareholders, shares the risks to the many shareholders, making risks and their associated losses not to be heavy for each shareholder to carry. A shareholder’s liability in a company is to the extent of his unpaid shareholding.
7. Wealth distribution
As shareholders share in the losses of the company so they share of the profits. Company that has few shareholders, enriches the few. While company with many shareholders enriches many. As a company mobilizes excess funds in the society through the capital market, so it does distribute wealth from its profits to the society in form of dividend paid to its numerous shareholders.
Conclusion
The advantages of having wide range of shareholders in firm can't be over emphasized. It provides large pool of cheap capital for a company for growth and expansion. It enhances management prudence, shares risks and distribute wealth.
Having wide range of shareholders in company can't be without disadvantages. We will discuss the disadvantages of having wide range of shareholders in company in our next article.
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