Introduction to Ownership Structure
It is important to understand what a share ownership structure is so that you can understand the diversity of the businesses around you.
A business does not just vary in size and industry but also in its ownership. This means that some businesses are owned by a single person, group of people, corporations, charitable foundations, or trusts. In fact, some businesses are also owned by the state. Basically, different ownership structure types overlap the different legal forms that a business can take.
It is important to understand what a share ownership structure is so that you can understand the diversity of the businesses around you. Being the owner of a business entity, it is important to understand how the ownership structure of a particular business entity is organized and what that means for the owner’s rights. This article will explain just that for you. Keep reading to know more!
What is an ownership structure?
With a few exceptions, businesses have owners. The nature and the number of owners usually vary a lot for each business. In fact, the owner of a business can be an individual or even another business. To make things more complicated, the rights of an owner to the business can be split between the economic and management rights. The management rights here refers to the ability to influence the appointment of the officers while the economic rights include the rights to receive dividends and profits of the business.
A lot of businesses also own other businesses. To be clear, there are basically three levels of ownership in a share ownership structure. These are parents, affiliates, and subsidiaries. Here, parent companies own the subsidiaries. The amount of ownership interest can range from a fraction to even a complete 100%. Additionally, an affiliate is a sibling legal entity.
This approach to ownership structure includes situations such as publicly-traded firms, closely-held companies, outside investors, and joint ventures. An ownership structure concerns the internal organization of a business entity and the rights and duties of the individual holding the equitable or legal interest in that business.
For instance, a shareholder who is also the owner of a corporation has certain rights. These rights are distinct from the ones of the members of a limited liability company. Additionally, within the corporation, a holder of preferred stock might have different rights as compared to the holder of common stock.
The ownership structure of a single company
When we talk about the ownership structure of a single company, it means that the company does not have any subsidiaries or associates in the picture. It is just one company that has a few shareholders in them. And there are different kinds of shareholders that make up the company, but not everyone has the rights and control over the company. Some have complete control, some of a little control while the others have no control at all.
Total Shareholder Composition
Let us understand this better starting with the definition of what a shareholder is.
What is a shareholder?
A shareholder can be defined as a company or an individual who legally owns one or more shares in a company. Both private and public companies have shareholders and they make up the company. But it is important to note that the shareholders own the stock in the company and not the corporation itself.
Based on the share class that is given to the shareholders, they get some extra privileges. This includes the right to vote in the election of the board members, the right to the company’s assets during liquidation, the right to buy new shares issued by the company, and the rights to a part in the distribution of the company’s returns.
Shareholders in the primary market who buy IPOs provide capital to corporations. However, the vast majorities of shareholders are in the secondary market and provide no capital directly to the corporation. This means that the shareholders of a public corporation are not – (1) owners of the corporation, (2) the claimants of the profit, or (3) investors, as in the contributors of capital.
Different types of shareholders
From the above, it is clearly understood that there are different types of shareholders that make a company. There are two types: common shareholders and preferred shareholders. Let us talk about each.
#1 Common Shareholders
Common shareholders are the shareholders who own shares from the common stock of the company. Basically, the common stock does not have a fixed value. The owners of the common stock have the last rights to the company assets and profits. Additionally, they may get dividends at the discretion of the company’s board of directors. This means that when the company performs well, the owners get a profit, and when the company suffers losses, the owners do not get anything.
Basically, they have an ownership stake in the company that comes with the following rights:
- The right to vote on most of the company decisions including how to respond to a hostile takeover or the board elections.
- The right to participate in a distribution of assets when the company is liquidated.
- The right to receive any common dividends the board declares.
But that is not all. Common shareholders also have the right to file a class-action lawsuit against the company in case there is an act of wrongdoing that potentially harms the company or negatively affects the value of its common shares. This enables them to exercise considerable control over how the company is managed and how it handles strategies for growth.
Just so you know, there are two kinds of shareholders that can own the common shares. But both do not have the same rights. Each has been explained below:
- Founder: These are the owners of the company and get complete rights over the company. This means that they are offered the common stock with all the rights of it as mentioned above.
- Employees: There are two kinds of employees that a company has, including early employees and later employees. The early employees are offered stock that has a few of the rights or most of the rights as they stood with the company during the early stages. But once a company is up and running, more employees join. Now, the company can offer the best ones with incentives through shares and is done by offering them common shares. There are special plans made for this and most of the rights are nullified, excluding the right to sell the shares. Learn more about employee share compensation here!
#2 Preferred Shareholders
Preferred shareholders are the ones who own the preferred shares in the company. These owners have the first claim to the profits and assets of the company. When the dividends are paid out, they get it first and they also get a fixed dividend. After that, whatever is left over, is given out to the common shareholders. These owners do not have any voting rights in the company, which means that they cannot influence the management in decision-making.
All they have is a guaranteed right to be paid a fixed amount of dividends every year and to get the payment before any of the common shareholders get it. The fixed dividend amount is attached to a specific interest rate. For instance, a $10, 5% preference share would pay an annual dividend of 50 cents.
This kind of share is normally offered to investors in the company. There are two kinds of investors:
- Individual Investors: These are people who invest their own money individually in a company in exchange for shares.
- Institutional Investors [angel & VC]: These are organizations that invest the money of others in a company. They become major players in the long-term investment market, such as pension funds, banks, insurance companies, and investment companies.
Ownership Structure of a Corporate Group
A corporate group, unlike a single company, is a group of companies. It is a collection of subsidiary corporations and parent corporations. Their aim is to work together as a single economic entity through a common source of control. The concept of a group is normally used in tax law, company law and accounting to attribute the rights and duties of one member of the group to another or the whole.
The forming of corporate groups usually involves consolidation via mergers and acquisitions, although the group concept focuses on instances in which the merged and acquired corporate entities remain in existence rather than the instances in which they are dissolved by the parent. The group may be owned by a holding company which may have no actual operations.
So, a corporate group has many sets of shareholders. But not everyone has the rights and control over the complete company group. Some have complete control, some of a little control while the others have no control at all. Unlike a single company, the share ownership structure in a corporate group is very diverse.
There are two kinds of shareholders here; majority shareholder and minority shareholder. Let us understand this better.
Having a large amount of holding of about 50% or more shares in the company puts a shareholder in a stronger position as they can pass special resolutions easily. They are the people who have bought interests in a company which also makes them partial owners of the company. As per company law, there is an important threshold to attain. With a majority of over 50% shareholding, the shareholders are able to pass normal resolutions like:
- appointing and/or removing directors; and
- authorizing the directors to allot shares (other than if there is oneclass of share, as this is authorized under company law).
Along with this, they also have the right to attend annual and general meetings and vote in matters regarding operations. Majority shareholders also have veto power on all decisions. All the rights are usually listed down in the Shareholders agreement deciding who is allowed what rights.
In case a shareholder has a minority shareholding, which is less than 50% of the shares in the company, then the following typical legal rights will apply based on how much percentage of shares they own:
- 5% or more: a shareholder is able to require circulation of a written resolution and can require a general meeting to be held;
- 10% or more: can demand a poll vote at a general meeting;
- 15% or more: can apply to the court to object to a variation of share class rights;
- more than 25%: a shareholder with this minority shareholding can block special resolutions e.g. adopting new articles of association or changing the company’s name;
As statutory rights will only afford a minority shareholder with limited protection, a minority shareholder should attempt to supplement their statutory rights with contractual protections in a shareholders’ agreement or in the Articles of Association of the company. Whether this is achievable or not will depend solely on the negotiating power of the minority shareholder. This is to ensure they have a degree of control and that they are in a position to protect their shareholding.
Additionally, a minority shareholder has the right to disagree to:
- the corporation selling, hiring or exchanging all or significantly all of its property;
- the maintenance of the corporation in another jurisdiction;
- the merging of the corporation with a corporation that is not an additional or parent; and
- to modify or take away any constraint on the business the corporation may carry on, or the alteration of the corporate articles to revise the provisions concerning the issuance or shift of shares.
Also if a minority shareholder who has 15% or more shares in the company feels that the business of the corporation has been carried on with a purpose to deceive any person, or the powers of the directors have been used in a way that is unfairly injurious, oppressive, or that unlawfully disregards the minority shareholder’s interest, the person can apply to the court for a solution.
A subsidiary is a company that has been acquired or set up by another company which is usually acquired by a public or larger company as a result of its reputation or longevity. The company that opens or acquires the subsidiary company is called a parent company. If a parent corporation exists strictly to hold stocks in other entities, it is called a holding company.
In such a situation, the parent corporation owns more than 50 % of the voting stock of each company acquired. If it holds all (100%) of the voting stock, the small entity is said to be a wholly-owned subsidiary. Parents and their subsidiaries are separate legal entities when it comes to liability issues. But there are situations where both the parent and the subsidiary company file their financial statements as a single unit. Also, ownership of 80 percent or more of a subsidiary’s stock is required for the parent corporation to submit consolidated tax returns.
In a broader sense, an associate company is a corporation in which a parent company possesses an ownership stake. Normally, the parent company owns only a minority stake of the associate company, as opposed to a subsidiary company. But the actual definition varies a lot based on the jurisdiction and the type of fields. The reason behind this is that the concept of an associate company is used in securities, taxation, accounting, economics, and beyond.
Basically, an associate company can be partly owned by another company or even a group of companies. And as per most accounting rules, the parent company (or companies) don’t consolidate the associate company’s financial statements. Normally, the parent company records the associate company’s value as an asset on its balance sheet.
Consolidated financial statements are the combined financial statements of a parent company and its affiliated companies or subsidiaries. But keep in mind that there are tax rules that must be followed by both companies and vary for each state and country.
How to record your company’s ownership structure or cap table?
Recording your company’s ownership structure means recording the shares and who owns how much of it in one place. There are two ways to do it. Each has been explained below:
#1 Using excel
The oldest way used by many founders to keep track of all the shares in a company was through Excel Spreadsheets. Let us assume there is a company named Best Service Inc. Here is an example of how the cap table was created on the Spreadsheet.
|Name||Type||Class of Stock||Number of shares||Ownership|
|Bob Turner||Shareholder||Common Shares||700,000.00||14.00%|
|Emily Davis||Shareholder||Common Shares||700,000.00||14.00%|
|Fred Wilson||Shareholder||Common Shares||500,000.00||10.00%|
|Anderson Capital LLC||Investor||Preferred shares||1,200,000.00||24.00%|
|Capital Partners Inc.||Investor||Preferred shares||1,400,000.00||28.00%|
However, this may not be the complete cap table. The reason is that we cannot see the details about the options, warrants, and convertible notes. If the company has any vesting shares or options as well, it may drastically dilute the ownership in your company.
In addition to this, as the company grows, it would become difficult to add all the details. You may be able to add it all up on excel, but the process may be frustrating and time-consuming. You might not be able to show the cap table easily to the other shareholders or investors as you constantly update it. That is why cap table software was created to eliminate any errors and keep your shareholdings up to date.
#2 Using software
As mentioned above, Excel is a powerful and affordable tool. But there are a lot of downsides to using it for a cap table. Fortunately, there is an equity management software that you can take advantage of. The software would reduce the risk of recording an improper transaction and the headache from consistent spreadsheet maintenance.
In addition to this, several cap table management software products offer services that handle all the complicated calculations for you, including the calculation of the fair value of the share-based compensation based on many assumptions like equity value, discount rates, volatility, etc.
Here are the benefits and features of most of the cap table software online:
- Cap table management – this is the main feature where you can easily manage all the shares in your company and handle the share ownership structure from here.
- Manage the records & filing – You can easily stay up to date with your records and filings.
- Issuing Electronic Stocks in Seconds – Issue new shares electronically, transfer existing shares, and do many other things through the application all online. And with everything online, you can easily make smarter decisions and see your company standing at any time.
- Manage Your Shareholders – You will be able to see all the transactions made by the shareholders online (after they are added to the application to view the cap table).
- Less Time Spent on Data Entry – Spend less time in adding the data in the application where you can easily enter many transactions at once.
Defensible 409A Valuations – Get a defensible 409A valuation prepared by the experts that would help you have safe harbor status from the IRS.
- Sharing Information With Others – You can easily share partial or complete information about the cap table with the shareholders or other people through the software. You can monitor who sees what and even download the reports to keep them offline.
All in all, the cap table software is the best way to keep track of your share ownership structure and your control in the company as well.
How can Eqvista help track your company’s ownership structure?
Now that you know what share ownership structure is, it is important to learn how to manage it well. Eqvista is an application that can help you do that. It will help you have an organized share structure, which is very important for showing the shareholders of their ownership in the company. You will be able to see the total shares outstanding, the shares issued, purchased, and authorized to owners and investors. In short, the cap table will act as the master ledger to show all the current shareholdings.
Here is the same example of the ownership structure of Best Service Inc on the Eqvista cap table software.
Having an up-to-date cap table helps you in managing all the shareholdings in the company. You will also be able to be compliant with the rules and regulations while dealing with compensation and taxes. Along with this, the investors that review your cap table will recognize the value of your company, and the deal will be made more easily.
With Eqvista, you can easily handle all the shares of your company. In fact, it has all the features mentioned above that a cap table software should have. In addition to that, here are some other benefits that Eqvista offers:
- Eqvista would assist you in filing your company with the Division of Corporations of your state.
- Ownership structure and shareholdings are transparent on Eqvista.
- The management of the cap table would display a clear provenance record
- The software would accurately calculate the corporate items like dividends and stock splits.
- A direct communication link would be set between investors and issuers.