Understanding the concept of shares in a limited company can be difficult for those who are thinking about company formation for the first time. We explain share capital, the different types of shares, voting rights and how to issue new ones after incorporation.
In order to register a private limited company, you must issue at least one share. It is essentially a ‘piece’ of the company, or a percentage of the business. Think of it like a cake cut into slices, or a pie chart. If a company issues only one, it is worth 100% of the company. If one person owns that one unit, one person owns the whole company.
If two or more shares are issued to more than one person, each person owns a piece of the company. Each unit normally represents one vote in a company; therefore, owning more provides a greater degree of voting power and control over the affairs of the company, and a bigger chunk of the business profits.
What is share capital?
This is the total capital of a limited company divided into shares (which have a nominal value). The minimum capital is one share and there is no maximum statutory share capital. Examples:
- A company issues 1 share at £1 (the nominal value of the share) – the total capital is £1.
- A company issues 10 shares at £1 each – the total capital is £10.
- A company issues 20 shares at £10 each – the total capital is £200.
Share capital sets the limited liability as well as the profit entitlement and decision-making powers of each owner.
What is authorised share capital?
Authorised capital is the maximum number of shares a company is authorised to issue. This restriction no longer applies to companies incorporated after 1st October 2009 (when the Companies Act 2006 came into force), unless they add the provision to their articles of association.
What is issued share capital?
This is the total nominal value of all shares issued by a company. The actual value (market value) may be different, depending on how much the business is worth at the time of selling the share. The nominal value is normally £1 per share, but can be otherwise.
The total nominal value of each member’s unpaid shares represents their total financial liability. They are legally required to contribute the nominal value of their unpaid shares if the business is unable to pay its bills or is wound up, or if the directors otherwise demand such payment be made (the shares are called upon).
- If a limited company issues one share, it represents 100% of the business. If only one is issued, the company can only have one shareholder. He or she will be the sole owner of that business. This is commonplace when setting up a company on your own as the sole shareholder and director.
- If two shares are issued, each worth 50% of the business, the company can have one or two owners. One person can purchase both of them and own 100% of the company. Or two people can each purchase one, thus each owning 50% of the business.
- If 100 shares are issued, each one is worth 1% of the business. The company can have between one and 100 shareholders. One person could buy all of them and own all of the business with a view to selling some at a later date. Alternatively, multiple people could buy one or more, thus each owning a portion of the company.
Different types of limited company shares
A share ‘class’ is a type of share. Each class has its own rights and conditions attached to it. These are outlined in the Articles of Association. There are many different classes, but most limited companies issue ‘Ordinary’ shares. As the name suggests, this is a standard class that usually offers equal voting rights, equal profit entitlement, and equal capital rights to all members.
Ordinary shares keep things simple, but this class may not be suitable or desirable for all companies; therefore, additional classes can be created during and after company formation to provide different rights and powers. The four most common classes other than ordinary are: preference, non-voting, and redeemable.
This class usually offers a preferential right above other classes to receive dividend payments from company profits. The dividend amount is usually a percentage of each share’s nominal value. Preference shares are typically non-voting and, in the event of a company winding up, they usually offer no right to surplus capital above and beyond the dividend amount.
These shares, which might enjoy rights to dividend payments, but have no say in how the company is run, are often issued to company employees as a tax-efficient strategy for paying part of their salaries as dividends. They are also created for family members of the main members of a company.
These are issued with an agreement that they will be bought back by the company after a fixed period of time, or at the instigation of the shareholder or company (dependent on the articles of association). Redeemable shares are often issued to employees with the proviso that they will be taken back at their nominal value if the employee leaves the company. In many cases, preference shares will be redeemable.
Other share classes
- Management: Carry multiple votes per share, or they have a smaller nominal value than other classes. They are usually issued to subscribers (the first owners of the company) to allow them to retain more control of the business than new members.
- Deferred Ordinary: Offer dividend payments after all other classes have been paid.
- Alphabet: These are usually ordinary shares divided into different classes, such as ‘A’ ordinary, ‘B’ ordinary, and ‘C’ ordinary. The purpose of this class is to alter the percentage of each right carried by an ordinary share. For example: A company has two members – one may have 50% voting rights, 50% dividend rights and 80% capital rights; the other will have 50% voting rights, 50% dividend rights and 20% capital rights.
The creation of new share classes usually requires the approval of the members, who also need to authorise the allotment of such shares.
Which class of shares is best when setting up a company?
As previously mentioned, most private limited companies in the UK are registered with Ordinary shares. However, it is entirely possible to issue more than one class of share during and after company formation. It really depends on the needs of your firm, but most small businesses only need to issue ordinary shares. This is certainly the case if they are set up with just one or two shareholders (members) and directors.
Ordinary shares are commonly used because they provide equal voting rights, dividend rights and capital rights. Increasingly, however, some companies will issue additional classes or convert existing shares to vary the rights of the owners. This may be desirable or necessary if members want to vary their voting rights to reflect different levels of superiority, or modify dividend and capital rights to reflect varying degrees of investment.
PLEASE NOTE: If you are considering issuing various classes, please speak to an accountant for professional advice.
Can I issue shares without voting rights?
Yes, a limited company can issue any class of share it wishes, including shares that carry no voting rights (although a company needs shares in issue that can indeed vote at all times). There are two common share classes that do not provide voting rights to the shareholder:
- Non-voting ordinary shares
- Preference shares
Typically, these classes are issued to people who have invested less capital and have therefore taken a smaller financial risk in the business. Their right to vote on certain affairs is either proportionally reduced or removed entirely.
Non-voting ordinary shares
Non-voting ordinary shares are often given to family members of existing shareholders, or to staff members through an employee share scheme. This allows the existing shareholders to distribute shares to other people whilst maintaining control of the company.
Issuing shares to employees can encourage new people to join a company, and it can help to retain and motivate existing staff. Share schemes are often an effective way to align employees’ interests with those of the company’s voting shareholders. The harder the employees work for the company, the bigger the potential reward because of their vested interest in the success of the business.
Companies can also use non-voting ordinary shares as a tax-efficient way to pay part of an employee’s salary. By paying some of an employee’s remuneration as a dividend, a company will have no tax liability on this money, other than the Corporation Tax it has already paid on profits (dividends are not an allowable deduction against company profits). Likewise, the employee will have no personal tax liabilities on any dividend payments received (up to the 40% income tax threshold).
Preference shares provide a shareholder with a preferential right to receive a fixed percentage of company profits through dividend payments before the shareholders of all other share classes. This type of share may also provide preferential rights over other shareholders to receive a portion of any remaining capital if the company is wound up.
Can I issue more shares after company formation?
The vast majority of private companies can issue more shares after company formation, provided the articles do not stipulate an authorised share capital. This is a now optional clause that restricts the total value of shares a company can issue.
If no restrictions are in place, and the directors are duly authorised, a company can issue as many shares as it wishes during or after formation. However, it is important to realise that when a company issues more shares, each one becomes diluted because they represent smaller portions of the company.
PLEASE NOTE: Guidance on issuing more shares after incorporation can be found at the end of this article.
How many issued shares should a company have?
There is no right or wrong number. It depends on the needs and preferences of the owners. If you are setting up a company as the sole owner and director, you can issue just one. But if you plan to grow your business and want the option of selling parts of the company in exchange for capital or to bring in a business partner, you should consider issuing more than one at the start. There is always the option of creating more after incorporation, but generally, it is easier to transfer ones that have already been issued.
The most popular quantities to issue are whole numbers like 10, 100, or 1000. This is because it’s far easier to apportion a percentage of ownership to these figures, rather than an odd number like 23. Issuing a higher quantity will allow you to sell small portions of the business to lots of different people.
However, the value of issued capital represents the financial liability of the owners. Therefore, if your business runs up any debts that it can’t afford to pay, the shareholders are legally required to contribute the nominal value of their shares toward these debts.
The nominal value is usually set at £1.00. If you issue one share at this value, your financial liability will only be £1.00. If you issue 100, the total liability of the owners will be £100. This is worth remembering if you are thinking about issuing thousands of shares and owning all of them yourself!
What are the Prescribed Particulars?
The prescribed particulars are the rights that are attached to each class of share in a company limited by shares. They can be found in the company formation documents, and are required as part of the Statement of Capital.
There is a standard set of prescribed particulars available for ordinary shares, but these are only available for companies that use the model articles of association provided in the Companies (Model Articles) Regulations 2008. The standard prescribed particulars are as follows:
- particulars of any voting rights attached to the shares, including rights that arise only in certain circumstances;
- particulars of any rights attached to the shares, as respects dividends, to participate in a distribution;
- particulars of any rights attached to the shares, as respects capital, to participate in a distribution (including on winding up);
- whether the shares are to be redeemed or are liable to be redeemed at the option of the company or the shareholder.
Companies not using the model articles of association will be able to draft their own prescribed particulars for each class of share, and in most cases, the rights attached to these shares will be determined by an agreement between the company and its shareholders.
When do I need to pay for my shares?
Shareholders are normally required to pay for their shares immediately upon taking them. This may be during or after company formation. In smaller companies, however, the first members who take their shares during the company registration process often leave them unpaid until the company requests payment (through a call up) or it is wound up. It depends on the provisions stated in the articles of association.
In larger corporations, payments are usually requested immediately. Some companies will allow members to make part payments with the proviso that the remaining balance is paid upon request.
How much do shares cost?
The cost of limited company shares can vary immensely, but most companies set a nominal value of £1.00 each.
The nominal value is the base amount (i.e. ‘face value’ or ‘par value’) that the company chooses. This is the absolute minimum value that can be accepted. It will remain unchanged for the life of the issued shares (unless changed with the approval of the Members, such as through a subdivision or consolidation of shares).
Companies are not legally permitted to sell them for less than their nominal value, but they can sell them for more.
Most members buy shares at their nominal value but the actual market value can increase as a company becomes more successful and profitable. In such instances, a premium will be added to the nominal value of any shares issued to new members. They will therefore have to pay the market value, not the nominal value.
How do I pay for my shares?
They are usually paid for in cash, but other considerations may be given at the company’s discretion. Other forms of payment include:
- Knowledge and expertise
- Goods or equipment
- Land or property
- Shares in other companies
- In exchange for debt repayment
Members may be able to pay wholly in cash or wholly in non-cash, partly in cash and partly in non-cash, or wholly in non-cash. Any cash payments must be paid into the company’s business bank account and recorded in its accounting records.
The director is responsible for updating the statement of capital on the next confirmation statement (formerly known as the ‘annual return’) to state which shares have been paid for and which remain unpaid. Companies House will disclose this information on public record.
Do I have to pay tax on shares?
Members do not pay tax if they are given shares for nothing, e.g. as a gift or as part of an employee scheme. Stamp Duty of 0.5% is payable if shares are bought through a stock transfer form for more than £1,000, but no tax is payable if the transaction is less than this amount. This tax must be rounded up to the nearest £5 and paid to HMRC.
Total sale value is £1550; 0.5% of this value is £7.75. This will be rounded up to £10.
If they are bought electronically through the CREST system (a computerised register of shares and shareholders) or outside of CREST (‘off-market’ payments), Stamp Duty Reserve Tax (SDRT) of 0.5% of the transaction is payable. SDRT is not payable if a recipient is given shares for nothing. If a recipient pays for them by some form of non-cash consideration, SDRT is still charged on the value of the non-cash consideration.
SDRT is deducted automatically through the CREST system and paid to HMRC. If they are purchased electronically outside of CREST, the purchaser is responsible for sending HMRC a written notice of the transaction.
What is share capital used for?
The money a company receives for its issued shares is typically used to expand or improve the business or pay debts. If a company allows its members to leave them unpaid, the nominal value will probably be requested only if the company requires capital to pay its debts or the company is being wound up.
Are members liable for more than the value of their shares?
The financial liability of company owners is limited to the nominal value of their shares, not the actual market value. If a company is unable to pay its debts or is wound up, members are not legally required to contribute more than the nominal value of their unpaid shares. If they have already been paid for, the members have no further financial obligation to the company.
How to issue more shares after company formation
If you have issued more shares after incorporation, you’ll need to let Companies House know with the Form SH01 ‘Return of Allotment’. The following information will be required:
- Company name.
- Registration number (CRN).
- Date of allotment(s).
- Details of new allotments – number, class, currency, nominal value, amount paid or unpaid in each.
- Details of non-cash payments, if applicable.
- Statement of capital – details of all issued shares in the company after the allotment of new ones.
- Prescribed particulars – the voting rights, dividend rights, capital rights and redeemable rights attached to each share.
- Authorising signature of the director.
Before issuing more shares, you must check the articles of association for any restrictions such as authorised capital, pre-emption rights, and the directors’ power to allot.
Upon issuing more, the director must deliver Form SH01 within one month of the allotment date. Details of new members do not have to be provided at this time because you will include this information on the next annual confirmation statement (previously called the ‘annual return’). It is considered good practice to send file a confirmation statement as soon as you can following the allotment.
The director must issue certificates for every allotment and update the statutory register of members, which is kept at the registered office address or SAIL address. A copy of each certificate should also be kept by the company. The PSC register may also have to be updated if any of the shareholders becomes eligible for entry onto it.