Advantages of Shareholder over Director in new Company
I don't know Australian law, but I will give my US perspective here.  The custom in the US is for officers and directors to be indemnified by the corporation, and that LLCs have an even broader power to indemnify (even to remove the duty of loyalty!).  Moreover, directors will typically be able to purchase D&O insurance to protect them from loss in the event of liability. For US corporations (not LLCs), the duty of care (prudence) requires that directors behave responsibly in weighing major decisions, and consult experts and specialists before coming to rash decisions.  It usually becomes a court case in the context of a large public company in the midst of an acquisition event.  The only people with standing (in the US) are shareholders.  If all the other shareholders are directors, then it may be hard for them to blame you. Additionally, if you are concerned about the propriety of your actions, there may be sources to rely on.  First, discussion with your fellow directors can be a helpful guide (though will not usually immunize you from any accusation of wrongdoing), and disclosure tends to cure almost any accusation of breaching the duty of loyalty.  Second, boards often secure the advice of legal counsel, and sometimes bring on lawyers as members or will outright hire counsel for the board.  Third, there may be services that will provide you with generic advice (e.g. UK Companies House and US-based IOD), which might set you at ease a little bit. I don't know the details of Australian law, as I say.  But my sense of common law countries is that, like the US, they are primarily concerned about negligence (incompetently or imprudently neglecting to understand the business and make informed decisions), disloyalty (fraudulently engaging in self-interested transactions that either hurt the company or should have been offered to the company), and recklessness (not bothering to seek out information).  As long as you are active, informed, engaged, and not engaging in secret deals outside the company (especially deals where either side is competing with the company), then that would be more than sufficient under the US standard. If you are concerned about liability, then inquire into indemnifications by the company (in the US, the company can usually pay all legal costs of directors), insurance, and legal counsel.  I imagine your business partners are no more savvy than you are.  My impression is you are overreacting to relatively rare and exotic expression of corporate law (at least in the US). But I'll close by repeating that I don't know Australian corporate law. I know the general principles of acting as a director in a company, and am familiar with the rights of shareholders. In the last ten years or so, I believe Australia has introduced legislation that strongly punishes those directors who do not act in a professional or prudent manner. While I will of course attempt to fulfill the duties required - I am new to conducting business at this level, and am concerned about mistakenly breaching some unknown rule/law and being subject to repercussions that I just don't know about. As you have already stated, the key to being director in a company is the additional responsibility. Legally you can be held in breach. At the same time you will be able to influence your decision much better if you a director and thus safeguard your interest. If you are only a shareholder, you cannot be held responsible for decision by company, individual malpractice may still be applicable, but this is less of a risk. However over a period of time, the board can take certain decision that may marginalize your holding in the company.
Another way to decide would be to do a fair valuation of the company agreeable to both the partners. Lets assume when you started the company it was worth $10,000 and to acquire 75%, you must have put $7,500 worth of money and effort. Similarly, the other partner must have put $2,500 worth of time and money. Now say after 2 years, you both agree that company is worth $50,000. And say now the company needs $10,000 worth of investment. Whoever invests that money should get 20% (10k/50k) of the company. Or each $1,000 will buy 2% in the company. Post this investment the equity division would be  First investor (you) 75% of 80% = 60 % Second investor (your partner) 25% of 80% = 20% Third (new) investor = 20% Now, if you alone decide to put all the money you stake will be 60 + 20 = 80% and your partner will be reduced to 20%. If you guys want to maintain equity as it was (75-25), you need to put money in the same ratio ($7500 and $2500). If you do that- First investor 60% + 15% (for $7,500) = 75% Second investor 20% + 5% (for $2,500) = 25%. Please know for IP-centric company valuation is very subjective. But, do make an effort to do the valuation at every stage of the company so that you can put a number in terms of equity for each investment. Also keep note - some companies have a combined CEO/Chairman of the board role. While he/she would not be allowed to negotiate contracts or stock plans, some corporate governance analysts advocate for the separation of the roles to remove any opportunity for the CEO to unduly influence the board.  This could be the case for dysfunctional boards. However, the alternate camps will say that the combined role has no negative effect on shareholder returns.   SEC regulations require companies to disclose negotiations between the board and CEO (as well as other named executives) for contracts, employee stock plans, and related information. Sometimes reading the proxy statement to find out, for example, how many times the board meets a year, how many other boards a director serves on, and if the CEO sits on any other board (usually discouraged to serve on more than 2) will provide some insight into a well-run (or not well-run) board. "If you swap the word ""shareholder"" for ""investor"" I think it helps clarify things. If you owned 51% of the company you'd get to say what to do with the cash, would you not? Managers are smart and successful, but ultimately just employees. Companies are beholden to their shareholders.   In a more practical sense, I would think the board (representing shareholders) and the upper management would have to come up with a plan. But shareholders have the ultimate say." "Hi, accounting major here!  A lot of people mentioned both tax advantages and ""cheap"" money (money you can borrow at a low interest rate).  Another reason businesses do this is to reward investors. Generally people with stock in a company want to see some of its operations financed with debt, instead of all of it financed from investors' money or profit. This way the company can grow more and still pay better dividends to its investors. However, you don't want too much debt either. It's a balance, and a way to see how much debt vs equity a company has is called a leverage ratio (leverage=debt). Hope this helps!" "It's actually the other way around.  Distributions in an LLC are usually based on  each member's equity share, although the operating agreement can specify how often such distributions are made.  Shareholders in a corporation can receive dividends, but those are determined by the corporation's board and can vary depending on the class of stock each shareholder owns.  Preferred-class shareholders, who may hold a smaller overall fraction of the company's outstanding shares than the common stock shareholders, may receive disproportionately larger dividends per share than common stock shareholders, which is one of the (many) reasons that preferred stock is a better choice when it is available.  Take, for instance, what Berkshire Class ""A"" shareholders receive in dividends per year compared to Class ""B"" shareholders. Here's a good link from LegalZoom that can explain what you're asking about: Explanation of LLC distributions I hope this helps. Good luck!" Not really on the corporate finance side, so excuse me if my explanation seems a bit verbose.  Nobody *wants* to give away control of their company, but investors are going to demand a pretty steep discount on your equity if you don't give them some way to steer management. Control is valuable, and to this extent, voting shares should always be worth *at least* as much as non-voting shares.  If the owner still retains 51% of the company, however, then the voting shares provide essentially no benefit over non-voting, barring the founder's sudden divestiture. With this in mind, there's basically no reason to issue voting shares in the first place.  On the other hand, with 40% of the voting power the founder's still have a key vote and will rarely be overturned unless a supermajority (84%) of the other investors disagree. This still gives them *de facto* control while offering equity holders some degree of security if the founders were ever to suddenly lose their mind. This added security allows the voting shares to trade at a premium over non-voting, which in turn allows the company to raise more money from their equity issuance. "I'm sorry, unless the employee has a contract he need not be rewarded during successful periods. However, the shareholder does have such a contract: the articles of incorporation.   Your quasi-communist ideology might characterize this situation as also unfair, but the fact remains that an investor is more valuable to a company than an employee is. Furthermore, an investor takes on risk, something an employee does not do. When I purchase CAT stock, I may very well lose everything. I am the last in the long line of creditors. However, the employee does not stand to lose anything, and is much higher in the line of creditors.   The days of Sinclair's ""The Jungle"" are over in this country. CAT has no obligation to pay above-market wages to its employees." "Many thanks for thedetailed  response, appreciate it. But I am still not clear on the distinction between a public company and the equity holders. Isn't a public company = shareholders + equity holders? Or do you mean ""company"" = shareholders+equity holders + debt holders?" Setting up an entity that is partially foreign owned is not that difficult. It takes an additional 1-1.5 months in total, and in this particular case, you guys would be formed as a Joint Venture. It will cost a bit more (about 3-5000). If you're serious about owning a part of a business in China, you should carefully examine what he means by 'more complicated'. From my point of view, I have set up my own WOFE in China, and examined the possibilities of a JV and even considered using a friend to set up the company under their personal name as a domestic company (which is what your supervisor is doing), any difference between the three are not really a big deal anymore, and comes down to the competency of the agencies you are using and the business partner themselves.   It cost me 11,000 for a WOFE including the agency and government registration fees (only Chinese speaking).  You should also consider the other shareholders who may be part of this venture as well. If there are other shareholders, and you are not providing further tangible contribution, you will end up replaced and penniless (unless of course you trust them too...), because they are actually paying money to be part of the business and you are not. They will not part with equity for you.  I'm not a lawyer, but think you should not rely on any promises other than what it says on a company registration paper. Good luck! Another person, not a shareholder or director, will be treated as when a bank loans you money. You are loaning out money and you are sort of getting interest income out of it or some other benefit, which needs to be put down in you company's annual return. Full source on the HMRC website. But for a shareholder or director is different matter. Check the HMRC source for sure and check with your accountant, if you have one. If you owe your company money You or your company may have to pay tax if you take a director’s loan. Your personal and company tax responsibilities depend on how the loan is settled. You also need to check if you have extra tax responsibilities if: If the loan was more than £10,000 (£5,000 in 2013-14) If you’re a shareholder and director and you owe your company more than £10,000 (£5,000 in 2013 to 2014) at any time in the year, your company must: You must report the loan on your personal Self Assessment tax return. You may have to pay tax on the loan at the official rate of interest. If you paid interest below the official rate If you’re a shareholder and director, your company must: You must report the interest on your personal Self Assessment tax return. You may have to pay tax on the difference between the official rate and the rate you paid. "You can learn very little from it. Company directories are often given share options or shares as a bonus, and because of that they are unlikely to buy shares. When they sell shares, you'll hear people shouting ""so-and-so sold his or her shares, they must know something bad about the company"".  The truth is that you can't eat or drink shares. If that company director owning shares worth a million dollars wants to buy a new Ferrari, he will find that Ferrari doesn't give free cars to people owning lots of shares. He actually has to sell the shares to get the money for the car, and that's what he does." Well, if one share cost $100 and the company needs to raise $10000, then the company will issue 100 shares for that price.  Right? However, say there's 100 shares out there now, then each share holder owns 1/100th of the company. Now the company will remain the same, but it's shared between 200 shareholders after the issuing of new shares.  That means each share holder now owns 1/200th of the company.  And hence only gets 1/200th of their earnings etc. Stock trading (as opposed to IPO) doesn't directly benefit the company. But it affects their ability to raise additional funds; if they're valued higher, they don't need to sell as many shares to raise a given amount of money.  And the stockholders are part owners of the company; their votes in annual corporate meetings and the like can add up to a substantial influence on the company's policies, so the company has an interest in keeping them (reasonably) happy. Dividends (distributing part of the company's profits to the stockholders) are one way of doing so. You're still investing in the company. The fact that you're buying someone else's share just means you're doing so indirectly, and they're dis-investing at the same time. "This is going to vary tremendously from country to country (and even from state to state, in some cases).  In general, though: Sole proprietorship: LLC: There are a lot of permutations depending on local law.  One thing that isn't actually much of an advantage is the ""limited liability"" component of the LLC.  Simply put: for a really small company the majority shareholders are usually going to be ""forced"" to stand surety for the company in their personal capacity. Limited liability only becomes available once the company has quite a lot of cash/assets (or the illusion of a lot of cash/assets). Update - noticed two further questions that appear very similar: Should all of these be merged?" Say the company has created 500 shares [or whatever number]. You have 10 shares [equivalent of 2%]. Now when new capital is needed, generally more shares are created. Say they create 100 more shares and sell it to venture capital to raise funds. After this happens; Total Shares: 500+100 = 600 You own: 10 shares Your Ownership % = 1.66% down from 2% Like wise for other older shareholder. The New Venture guy gets 16.66% of ownership.   More funds would mean more growth and overall the value of your 10 shares would be more depending on the valuation.