How Many Shares Do I Need to Issue at Time of Company Formation?

Last Updated: Mar 15, 2021
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When forming a new Ltd company every shareholder, upon incorporation with Companies House must be issued a minimum of one share in companies that are limited by shares. Unless the company’s article states otherwise, the company can issue a number of shares during or after incorporation. This clause is an optional clause that allows the shareholders decide the amount of shares the company can offer. It is totally the decision of the original or previous shareholders/investors.

Should I issue more than one share per shareholder?

If it is a company with one share owner, the share will automatically be worth one hundred percent of the company and this brings complications if the company intends to allow investors to invest in the company much later because you can’t break down a company share worth one hundred percent.

Except they have previously paid for it, shareholders are meant to contribute the nominal value of their shares whenever the firm is a difficult financial position or else it is dissolved. £1 is the nominal value of an issued share; this automatically implies that the amount of shares you own as a shareholder is directly proportional to your liability.

Why do many companies issue 100 shares?

One share often represents 1 percent, so companies limited by shares often issue one hundred shares. This minimises financial liability of a shareholder and makes it easy to know how much of the business is owned by a particular shareholder and how much control such a person can have. Since only a few people buy a large chunk of the shares, more capital can be raised as opposed to selling smaller portions to so many people.

A historical importance is attached to the issuance of one hundred shares. Limited companies were mandated to include authorised share capital in their articles before the Companies Act of 2006 was introduced. This was the determinant of Stamp Duty a company was required to pay after incorporation; the preference was with one hundred shares limit because the Stamp Duty payment was restricted, even though it still supported the issuance of a reasonable amount of shares during or after the formation of the company.

If the value of paper share transfer is more than £1000, the Stamp Duty on shares is payable only to HMRC.

What is the best share class to issue?

It is possible to issue more than one share class during and after the formation of a company. However, most firms register with Companies House with only ordinary shares. The needs of your company determine the class you’ll choose, however, ordinary shares are often issued by small businesses that have very few shareholders. This is because this share class offers equal dividend rights, voting rights and capital rights to every shareholder.

Additional share classes are issued by some companies to make the rights of their shareholders uneven. This is important if you feel the need to vary shareholder’s rights, modify dividend and capital rights, and reflect different superiority levels all to reflect varying levels of investment.

Some other types of shares include alphabet shares, non-voting shares, preference shares and redeemable shares.

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Can I issue shares without voting rights?

‘Preference shares’ and ‘Non-voting ordinary shares’ can be issued without voting rights. People whose presence in a firm presents fewer risks are those issued this type of share, meaning that their voting rights have been minimized or possibly entirely removed.

  • Non-voting ordinary shares

This enables existing shareholders to offer shares to people even though he still holds control over the firm. This type of share is mostly given to members of staff or family members of an existing shareholder.

An easy way to encourage new people and motivate existing staff is to offer them shares. It is also an effective way of getting the interests of the shareholders and that of the employees to align. This is because the employee understands that the harder he/she works, the larger the reward expected.

Non-voting ordinary shares can also be used by companies as a tax-efficient method to pay a percentage of an employee’s salary. Apart from corporate tax which the company had already paid on profits, the payment of a part of an employee’s remuneration as a dividend has no other tax liability. More so, no other personal tax liability on the money received as dividend payments (a tax threshold of up to 40% income) can be charged to the employee.

  • Preference shares

This type of share gives shareholders the opportunity to receive a percentage of firm profits as a dividend before the shareholders from other classes. Also, if the company gets wound up, this share type will receive preferential treatment in the disbursement of the remaining capital.

When do I need to pay for my shares?

Except the company goes into liquidation or is wound up, there can be no obligation for shareholders to pay for their shares. However, most shares are paid for when they are issued because shares are majorly offered to raise capital. Depending on the method of payment, any payment made for shares must be recorded in the company’s accounts.

Shares can be paid for through: cash, services, goodwill, property, goods, expertise and knowledge, and even existing shares in another firm. Therefore, individuals may pay for shares with complete cash, part-cash and part non-cash or completely by a non-cash method.

The nominal value of a shareholders share is all that is required of them to pay in the event of the company being wound up. No extra financial commitment is required after shares have been paid for. The nominal value of their shares must be paid for by the shareholder in the case of a company being wound up with some share remaining unpaid.

Article by

John Carter

John Carter is a leading expert in the company formations industry. He has assisted countless business owners incorporate companies and is a font of knowledge when it comes to starting a company! If you found this blog interesting, please do share the love!

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