A Complete Guide to Limited Company Shares
To form a limited company, there must be at least one share issued. A share is a piece of the company or a percentage of the business – a bit like a slice of pie. If the company only issues one share and one person owns that one share, then they effectively own the entire company as the sole shareholder. If there are two shares issued, owned by two different people then they both control 50% of the company and are considered to be equal shareholders. Here we will examine the world of limited company shares and how they should be issued and handled.
In most limited businesses, the total capital of the company is divided into shares. A company can issue as many shares as it wants with the value that it wants to assign them. This is called share capital. For example:
- Company issues 1 share valued at £1 – total capital is £1
Company issues 10 shares at £1 each – total capital is £10
Company issues 20 shares at £10 each – total capital is £200
The share capital also sets the limited liability, the profit entitlement and the decision-making powers of the shareholders.
Issued share capital is the total value of the shares that have been issued by a company. The actual or market value can be different to this, depending on the worth of the business when the share is being sold. A nominal value of £1 is always given to any share.
The total nominal value of the unpaid shares for each member represents their total financial liability. So if the business is unable to pay its bills or is wound up, each shareholder is legally required to contribute the nominal value of their unpaid shares.
So if a limited company issues just one share that represents 100% of the business, then it only has one shareholder. That person is the sole owner of the business and is often also the director of the company. If two shares are issued, then the company can have one or two owners, depending on whether one person buys both shares or two people buy one share each. Finally, if 100 shares were issued, each shareholder would be in control of 1% of the business, although one person could hold more than one single share.
Types of shares
There are also different types of shares that can be issued, each having different rights and conditions attached to it. These are outlined when the company is formed. Examples of types of shares include:
- Ordinary – this is the standard type of shares issued and offer equal voting rights, profit entitlement and capital rights to everyone who holds one
Preference – this puts these shares above others in terms of dividend payments from the company profits. The dividend amount is normally a percentage of the nominal value of each share. Preference shares are normally non-voting and if the company is wound up, they offer no right to surplus capital over the dividend amount
Non-voting – issues to employees as a tax-efficient strategy to pay part of their salary as dividends. They are also issued to family members of the main members of the business
Redeemable – these are issued with the stated right for the company to buy them back after a certain period of time. They are often issued to employees and are sold back to the company if the employee leaves
The majority of companies in the UK use ‘ordinary’ as their class of shares when the company is formed. But companies can also choose to issue various types of shares if there are more than one or two shareholders. If you are unsure what type of shares would be best, then you can always get advice from a company formation expert as part of a company formation service.
Regardless of the type of shares issued, the company can change the class after formation as long as this is stated in the articles of association. Otherwise, company members will need to authorise the allotment of additional classes.
How many shares to issue
Another question that is often raised when forming a company is regarding how many shares to issue. There is no right or wrong answer to this, it simply depends on the situation of the business. For example, if you are setting up a company as the sole owner and director, then you can issue just one single share that you buy yourself. But if a company is seeking to grow and wants to sell parts of itself to raise the capital it needs to expand, then you may need to issue more shares and this can be done when the company is formed. Whole numbers such as 10, 100 or 1000 are favoured because it is easier to assign a percentage of the business by this.
Issuing shares after the company is formed
Another option with regards to shares is to issue them later, after the company has been formed. To do this, you need to complete form SH01 with Companies House along with certain information. This includes the company name and registration number, the date of share allotment and details of the shares, details of non-cash payments and statement capital as well as prescribed particulars such as voting rights, dividend rights and redeemable rights for each share. Each company director then needs to sign the form.
Further useful information
When a company issues shares to new shareholders or to employees that have never owned shares before, that person may not be entirely sure about their role as a shareholder. In this post we explain what a shareholder is and what they do.
Should you need to remove a shareholder from your company at some point in the future, we have a very useful blog post about how to remove a shareholder.