Voting Shares vs. Non-Voting Shares: What’s the Difference?
Understand how share structures separate governance rights from economic interests, a distinction that directly impacts a stock's value and a shareholder's role.
A share of stock represents a unit of ownership in a corporation. Companies can create various classes of stock with distinct rights, which leads to a primary distinction between shares that grant voting rights and those that do not. This difference is fundamental to understanding how corporations structure ownership and control.
Core Rights and Powers of Voting Shares
The ownership of voting shares grants a shareholder a direct voice in corporate governance through the right to vote on significant matters. This power allows shareholders to steer the company’s strategic direction. The standard is one vote per share, although some corporate structures can alter this ratio.
A primary function of these voting rights is the election of the board of directors. The board is responsible for overseeing the company’s management and making high-level strategic decisions. By voting for directors, shareholders influence the composition of this governing body to represent their interests.
Beyond director elections, shareholders vote to approve major corporate actions like mergers, acquisitions, and the sale of substantial company assets. This prevents management from making such decisions without owner approval. Shareholders must also ratify amendments to the corporation’s foundational documents, including the articles of incorporation and the bylaws that govern internal operations.
Characteristics of Non-Voting Shares
Non-voting shares provide an economic stake in the company without participation in corporate governance. While they cannot vote on directors or major transactions, holders are entitled to receive dividends and a portion of the company’s assets upon liquidation, after creditors are paid.
Often, non-voting shares are structured as preferred stock, which carries additional economic advantages. These may include dividend preference, where preferred shareholders are paid before common shareholders. Some preferred shares also feature cumulative dividends, where any missed dividend payments accumulate and must be paid out before any dividends are distributed to common stockholders.
Corporate Structuring and Issuance Considerations
Companies establish dual-class share structures to raise capital without diluting the control of a specific group, a common strategy for family-owned businesses and tech startups. By issuing non-voting shares to new investors, founders can secure funds while retaining decision-making authority through their ownership of voting shares. This allows them to maintain control over the company’s strategic direction.
The authority to create and issue different classes of stock must be explicitly outlined in the company’s articles of incorporation, complying with state corporate laws. This legal document details the rights and limitations of each share class. Amending the corporate charter to create a new class of shares typically requires approval from existing voting shareholders.
Tax and Valuation Implications
The distinction between voting and non-voting shares has financial consequences in their valuation. A voting share is more valuable than a non-voting share because of the influence it provides. This difference in value is known as a “control premium,” and valuation experts must quantify this premium when assessing the fair market value of a block of stock.
This valuation difference is important for gift and estate tax purposes. Transferring a controlling block of voting shares can result in a higher tax liability than transferring non-voting shares because the IRS requires the control premium to be included in the valuation. For example, gifting voting shares to heirs often leads to a higher tax assessment than gifting non-voting shares, as the value must incorporate the power those shares hold.
The classification of shares can also affect eligibility for certain tax benefits. For instance, the Qualified Small Business Stock (QSBS) exclusion under Internal Revenue Code Section 1202 allows for a capital gains exclusion on the sale of eligible stock. Both voting and non-voting shares can qualify for this treatment.