Learn more about what voting rights are in business.
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When forming your own business, you can control who can make decisions for the company. You can limit the influence of investors over the company by regulating shareholder voting rights in your Operating Agreement or Corporate Bylaws. The definition of voting rights includes the fact that voting is one way for shareholders to control the company without being present.
Voting rights definition: the right of shareholders to make decisions about the company. In a corporation, the Board of Directors holds the most operational decision-making power. Voting rights mean the shareholders can approve major decisions, such as appointments to the Board, executive compensation, and other investor concerns. In most cases, shareholders get one vote for each share they own, but a stock class may limit voting rights.
You might not use voting rights if you run a limited liability company. However, a similar concept applies to manager-managed LLCs. The managers can limit the voting rights of non-manager members in the LLC Operating Agreement.
A business owner can maintain control of the company by issuing stock with differentiated voting rights. The person who owns a majority of the company’s shares (called the “controlling share”) holds the most decision-making power. A small business starts out as a “private company” with the forming shareholders or members holding a majority of common shares. By offering investors a separate “preferred” class of stock without voting rights, the owners can maintain control of corporate policy.
Following state law, a company can limit the shareholders’ rights in its formation documents — which can be the company charter or bylaws. State law sets the minimum requirements for voting rights and quorums, meaning the fewest votes needed to pass a resolution. When a company goes public, the corporation can control shareholder rights under the rules and guidelines of the Securities and Exchange Commission (SEC) and the exchange that lists the company’s shares.
Although differentiated shareholder rights can help small business owners control the company, it can leave minority shareholders without decision-making power. An over-concentration of power in the hands of a majority shareholder creates a risk of the majority shareholder taking advantage of their power. Thus, one of the voting rights disadvantages is a loss of control for minority shareholders.
When researching the voting rights business definition, you might come across these terms:
No matter what you call it, voting rights are an important feature of corporate governance. You’re most likely to encounter voting rights when dealing with investors and publicly-traded corporations.
Most state laws give shareholders the right to vote at annual and special meetings. However, many large companies have hundreds of shareholders, especially those traded on the New York Stock Exchange (“NYSE”). To vote without being present, most shareholders vote “by proxy.” When voting by proxy, the shareholders authorize someone at the meeting (typically a company manager) to submit their vote.
Voting rights mean the right of shareholders to vote on and approve major business decisions. Business owners can limit outside control by issuing a stock class that doesn’t come with voting rights.
When you form your business with us, we’ll be here with the guidance you need. Whether you’re wondering about voting rights, naming conventions, or taxes, we can help. Our team will help you form your company and manage compliance so you can get back to running your business.
Disclaimer: The content on this page is for informational purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.