Understanding the concept of limited company shares can be difficult if you are setting up a company for the first time. To help you to gain a better understanding, we will explain the meaning of share capital, the different types of shares a company can have, the different rights attached to shares, and how to issue new shares after company formation.
To register a company limited by shares, you need to issue at least one share. A ‘share’ is simply a portion or percentage of the company – like a section of a pie chart or a slice of cake.
If a company issues only one share, it represents 100% of the company. If one person owns that share, they own the whole company. However, if two or more shares are issued, the company is divided into sections, which means that more than one person can own a percentage of the business.
Typically, each share provides the right to a certain percentage of profits, as well as one vote on important business decisions. Therefore, owning more shares usually provides more voting power, greater control over the business, and a higher profit entitlement.
What is share capital?
Share capital is the total amount of money (‘capital’) invested by shareholders (‘members’) in exchange for shares in a company. For example:
- A company issues 1 share at £1 (the nominal value of the share) – the total share capital is £1
- A company issues 10 shares at £1 each – the total share capital is £10
- A company issues 20 shares at £10 each – the total share capital is £200
Share capital determines the financial liability, profit entitlement, and decision-making powers of each shareholder.
What is authorised share capital?
Authorised share 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 a specific provision is included in the company’s articles of association.
What is issued share capital?
Issued share capital is the total nominal value of all shares issued by a company. The actual value (market value) may be different, depending on what the business is worth at the time of selling the share(s). The nominal value is normally set at £1 per share, but it can be any sum.
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 company demands payment by ‘calling up’ the shares.
- If a limited company issues one share, it represents 100% of the business. If only one is issued, the company will have one shareholder who is the sole owner of the business. This is commonplace if you set up a company on your own and become the sole shareholder and director.
- If two shares are issued, the company can have one or two owners. Each share can represent 50% of the business – or different percentages such as 70% and 30%, for example, if one member contributes more capital to the business. One person can purchase both shares and own 100% of the company, or two people can own a percentage of the business by purchasing one share each.
- If 100 shares are issued, each share would normally be worth 1% of the business. The company can have between one and 100 shareholders. One person can buy all of the shares and own all of the business, perhaps with a view to selling some of them at a later date. Alternatively, multiple people can buy one or more shares, which would result in each person owning a certain percentage of the company.
Different types of limited company shares
A share ‘class’ is simply a type of share. Each class has its own rights and conditions attached to it, which are outlined in the company’s articles of association (and shareholders’ agreement, if the company has one). There are many different classes, but most limited companies issue ‘Ordinary’ shares. This is the standard class that usually provides equal voting rights, profit entitlement, and capital rights to all members.
Issuing only Ordinary shares keeps things simple, which is why it is the most popular type of share. However, this class may not be suitable for all companies. In such instances, additional classes can be created during or after company formation to provide different rights and powers to members. The most common share classes other than ordinary are:
This class usually offers a preferential right above other classes to receive dividend payments from company profits. Normally, the dividend amount is 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 limited company shares (which may provide rights to dividend payments, but no right to vote on company decisions) are often issued to employees because they offer tax-saving benefits to both the business and its employees. Non-voting shares are also commonly issued to family members of shareholders.
This class is issued with an agreement that the shares 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 are redeemable.
Other share classes
- Management shares – This class carries multiple votes per share or has a smaller nominal value than other classes. Management shares are usually issued to subscribers (the original owners who join the company at the time of its incorporation) to allow them to retain more control of the business than future members.
- Deferred Ordinary shares – This class offers dividend payments after all other classes have been paid.
- Alphabet shares – 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 member has 50% voting rights, 50% dividend rights, and 80% capital rights; the other member has 50% voting rights, 50% dividend rights and 20% capital rights.
Generally, members must approve the creation of new share classes. To authorise the allotment (issue) of new shares, members are required to pass a resolution at a general meeting or in writing. In some companies, the articles of association may grant this power to the directors.
Which class of shares is best when setting up a company?
Most private limited companies in the UK are registered with just Ordinary shares, but it is possible to issue more than one share class during and after company formation. It simply depends on the needs of your business. Ordinary shares are suitable for the vast majority of new and existing companies, particularly those that are set up with just one or two shareholders.
Ordinary shares are commonly used because they provide equal voting rights, dividend rights, and capital rights. However, some companies choose to issue additional classes or convert existing shares to vary the rights of members. This may be necessary if members want to vary 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 different share classes, we would advise seeking professional advice from an accountant.
Can I issue shares without voting rights?
Yes, you can issue any class of shares, including shares that carry no voting rights. However, your company must always have some issued shares that carry the right to vote.
There are two common share classes that do not provide voting rights to members:
- Non-voting ordinary shares
- Preference shares
Typically, these classes are issued to members who invest less capital and, therefore, have less 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 shareholders or to staff members through an employee share scheme. This allows existing shareholders to distribute shares to other people whilst maintaining control of the company.
Issuing shares to employees is a great strategy for attracting, incentivising, and retaining staff. Share schemes are also 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 utilise non-voting Ordinary shares as a tax-efficient way to pay part of their employees’ salaries. By issuing dividends to staff, the company can reduce its employers’ National Insurance bill, and employees will benefit from reduced personal tax liabilities.
Preference shares provide shareholders with a preferential right to receive a fixed percentage of company profits through dividend payments before members with other share classes. This type of share may also provide preferential rights over other members 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 include a provision of authorised share capital. This is an optional provision 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 incorporation. However, it is important to understand that the value of existing company shares is diluted (reduced) when more shares are issued.
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 members. If you are setting up a company as the sole owner and director, you can issue just one share. But if you plan to grow your business and you want the option to sell parts of the company and bring in new business partners, you should consider issuing more than one share. You can always create more shares after incorporation, but transferring existing shares is usually quicker and easier.
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 of shares will also allow you to sell small portions of the business to lots of different people.
However, the value of issued share capital represents the financial liability of members. Therefore, if your business runs up any debts that it can’t afford to pay, members will be 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 members will be £100. It’s important to be aware of this if you are considering issuing thousands of shares and owning all of them yourself!
What are the Prescribed Particulars?
Prescribed particulars are the rights attached to each class of shares. They can be found in the company’s incorporation documents. Prescribed particulars are also required as part of a company’s Statement of Capital.
There is a standard set of prescribed particulars available for Ordinary shares, but these are only available to companies that adopt the Model articles of association. As per 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 that do not adopt the Model articles in their entirety can draft their own prescribed particulars for each class of share. In most cases, the rights attached to these shares will be determined and agreed by the 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 (those who take their shares during the company formation process) often leave them unpaid until the company requests payment or is wound up. It depends on the provisions stated in the articles of association.
In larger corporations, payments are usually requested immediately, particularly if the objective of issuing the shares is to raise investment capital for the business. 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 buying limited company shares can vary significantly, but most companies set a nominal value of £1.00 each. The nominal value is the base amount (i.e. the ‘face value’ or ‘par value’) that the company chooses. This is the absolute minimum value that can be accepted.
The nominal value of a share is fixed for the life of that issued share, unless it is changed by special resolution of the members – for example, through a subdivision or consolidation of shares.
Companies are not legally permitted to sell shares for less than their nominal value, but they can sell them for more – i.e. if the market value of the share is higher than the nominal value.
Most members buy limited company shares at their nominal value, but the actual (market) value can increase as the business becomes more successful and profitable. In such instances, a premium will be added to the nominal value of any shares issued to new members. This means that new members will have to pay the market value, rather than the nominal value.
How do I pay for my shares?
Payment of shares is normally made 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.
Directors are responsible for updating the statement of capital on the next Confirmation Statement (formerly known as an ‘Annual Return’) to state which shares have been fully paid and which shares remain unpaid. Companies House will disclose this information on public record.
Do I have to pay tax on limited company 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.
- The total sale value of shares is £1550
- 0.5% of this sale = £7.75
- Stamp Duty tax is rounded up to £10
If limited company shares 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 the 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 automatically deducted and paid to HMRC through the CREST system. If the sale is carried out 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 to pay debts. If a company allows its members to leave shares unpaid, the nominal value will be requested if the company requires capital to pay its debts or if the business is being wound up.
Are members liable for more than the value of their shares?
The financial liability of members is limited to the nominal value of their shares. 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 paid for their shares, members have no further financial obligation to the company.
How to issue more shares after company formation
If you issue more shares after incorporation, you must notify Companies House on Form SH01 ‘Return of Allotment’. The following information will be required:
- Company name
- Company Registration Number (CRN)
- Date of allotment(s)
- Details of new allotments – number, class, currency, nominal value, the amount paid or unpaid on each share
- 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
- 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.
When new shares are issued, the director must deliver Form SH01 to Companies House within one month of the allotment date. You do not have to provide any shareholders’ details at this time – you can include this information on the next annual Confirmation Statement. However, it is considered best practice to file a Confirmation Statement as soon as possible after the allotment.
Directors are responsible for issuing share certificates for every allotment. A copy of each certificate should also be kept by the company. The company’s statutory register of members must be updated straight away, and you may also have to update the Register of People with Significant Control (PSC register).