Company profits are distributed according to the provisions of the articles of association. Limited by shares companies are set up by profit making businesses, which means that surplus income is normally paid to shareholders in relation to the number and value of their shares.
Companies limited by guarantee, on the other hand, are usually set up by non-profit businesses and charities that generate income to promote and achieve their non-profit aims. Therefore, surplus income is not usually paid to members. If it is, the company forfeits its right to charitable status.
Companies can also use trading profits for many other reasons, such as:
- Growing the business.
- Purchasing new equipment or premises.
- Funding new projects.
- Investing in other businesses.
- Conducting research and development.
- Implementing marketing and branding strategies.
- Paying for advertising and promotional materials.
Allocating company profits
The allocation of trading profits is decided by the initial shareholders or guarantors (the ‘subscribers’ who set up the company) during the incorporation process. The directors, who may or may not also be shareholders or guarantors, are responsible for trying to make the business as successful and profitable as possible for the benefit of these members.
Income is allocated accordingly to running costs, expenses, salaries and wages, national insurance and benefits and all other costs and liabilities. Only after these costs and expenses have been paid can dividend payments be issued to shareholders.
Value of shares
The profits a shareholder is entitled to receive is determined by the number, class and value of his or her shareholdings. Each share represents a percentage of the business, thus a percentage of profit entitlement. For example:
- If a company has one shareholder who owns 100% of the issued shares, he or she will be entitled to 100% of the surplus income.
- If a company has two shareholders and issues two shares of equal value, each shareholder will own 50% of the company and be entitled to 50% of the surplus income.
Shareholders may choose to leave this money in the company to further the aims of the business. Or they can take their portion of profits as dividend income.
There is no limit to the number of shareholders a company has or the number of shares it issues, but the value represented by each share will be diluted if the number of issued shares increases. This will affect a shareholder’s percentage of ownership, profit entitlement, control and decision-making power. These are important factors to consider when deciding on the number of shares to issue during or after company formation.
How to register a company
Companies limited by shares or guarantee can be registered at Companies House by postal application, online via Companies House Web Incorporation Service or through an online company formation agent. However, the Web Incorporation Service is only available if you are setting up a limited by shares company and adopting Model articles.
The quickest and easiest way to register any type of company is through an authorised agent like Rapid Formations. Applications are completed and submitted online, and they are normally approved by Companies House within 3 working hours.
To complete an application, you must provide the following information:
- Company name.
- Registered office address.
- Directors’ details (one or more), incl. service address details.
- Shareholders’ or guarantors’ details (one or more), incl. service address details.
- Company secretary details (appointment optional).
- Memorandum and articles of association.
- Share capital (limited by shares companies only).
- People with significant control (PSCs).
Upon incorporation, we will send you an email containing digital copies of your certificate of incorporation, the memorandum and articles of association, and share certificates (if applicable). Companies are immediately ready to trade as soon as Companies House approves the application.