Shares and Shareholders Explained
When forming a company, you’ll have to familiarise yourself with your shareholding company’s key terms and definitions, including “shares” and “shareholders” and what these terms mean for your business.
In order to understand the duties and responsibilities of a shareholder, it’s important to recognise just what those shares are with simple examples of their purpose in a shareholding company.
What Are Shares?
Shares are a part or “portion” of a company that is limited by shares and is simply a divided-up unit of the value of a company (each share is a specific percentage of the entire business). The shares owned by individuals of a shareholding company are called “shareholders” or “members” (more on “shareholders” later).
How much of a company is owned or controlled by a member is reflected in the number of shares that the member holds. Typically, shareholders receive a percentage of trading profits in relation to their ownership percentage.
What Is the Value of a Share?
Shares have both a market and nominal value — the difference between each is known as a “premium”.
The nominal value of a share, which is typically £1, is the sum that a member has either paid or agreed to pay for their segment/portion of the company. This sum is the reflection of how much a member would legally need to pay towards company debts or when the company suffers a winding up order. Therefore, the “limited liability” of a company’s owners is reflected in the nominal value.
A share’s market value is simply the amount it is worth at the point of being sold. This figure will invariably differ from the nominal value.
How Many Shares Can be Issued by a Company?
One (1) is the minimum number of shares that a company may issue. This is normal when an individual sets up a limited company and is the sole owner and director. There is no upper threshold, therefore you may issue as many shares as you deem necessary during the company incorporation process or after your company has been formed.
Here are some fairly straightforward examples of popular share structures:
- One issued share = 100% company ownership.
- Two of equal value = 50% ownership per share.
- 10 of equal value = 10% ownership per share.
- 100 of equal value = 1% ownership per share.
So, if a business has a £100 million worth, and there are 50 million shares, then each share is worth £2 (normally listed as 200p). Those shares can fluctuate in value for a number of reasons.
Companies issue shares in order to raise money. Subsequently, investors purchase company shares believing that the company will be a profitable success and they can subsequently have “their share” of the success.
Can Different Types of Shares Be Issued?
Owners of a shareholding company can form and issue whatever type of shares they like. This can be done during company registration or once your company has been incorporated. Many companies prefer to issue “Ordinary” shares that are of equal value, providing parity on profit and voting rights between members.
Alternatively, a company may wish to issue multiple types (“classes”) and values of shares in order to provide various voting and profit rights for its members.
Note: A potential shareholder can only buy shares in your company if you are listed on a stock exchange; this can only happen when you have completed an Initial Public Offering — for example, on the London Stock Exchange — a process through which your company transforms from being a private company to a public company, allowing “the public” to eventually purchase said shares.
What Is a Shareholder?
Shareholders are any individuals who own shares in a shareholding company — that is, a company limited by shares.
Limited company shareholders (members) form an agreement to become part of a company by investing in at least a minimum of one share.
The number, and value, of shares held by a member reflects how much of the business is owned by the shareholder. And remember, each member/shareholder is entitled to receive a portion of profits in relation to the number and value of their shares.
Subsequently, the amount and value of these shares determines the decision-making authority each limited company shareholder possesses in addition to the extent of their personal liability for debts.
The first members in a company — the people who set register the business and agree to become members — are also known as “subscribers” because they subscribe their names to the memorandum of association during the company formation process. Incidentally, it’s vital that you find out how to get a copy of memorandum and articles of association.
Who Can Become a Shareholder?
Shareholding companies can have any of the following as shareholders:
- Individual person
- A group of individuals
- Another company/organisation/corporate body
Although shareholders have the ultimate say and authority over important business decisions, they’re not permitted to be involved in the daily management and running of financial matters as this is the remit of the company director.
Notably, limited company shareholders can appoint themselves as company directors, meaning they can form a limited company by themselves and undertake both shareholder and director roles. This is common practice in small companies.
What is the Difference Between a Shareholder and Subscriber?
A “subscriber” is the first member of a private limited company. During company formation, subscribers will include their names in the memorandum of association, which is a confirmation that the original limited company shareholders have agreed to become company members.
Even if they leave the company after some time, the shareholders are included in the public register and remain on the memorandum. Any person or corporate body who becomes a shareholder after incorporation will not be regarded as a subscriber; instead they will only be called a “member” or “shareholder”.
What Are the Roles of a Shareholder?
Company shareholders have a number of roles, including:
- Receiving a portion of available profits with regards to their shareholdings
- Deciding which powers to give to company directors
- The investment in a business
- Authorising the structure of dividends
- Contributing to company debts up to the limit of their liability
- Putting in place the set particulars attached to shares
- Appointing and removing directors
- Authorising the allotment and/or transfer of shares
- Decision making in exceptional situations where directors have limited powers (e.g. changing the company structure, changing the name of the company, modifying the articles of association, as well as making modifications to the shareholders’ agreement)
- Setting the salaries of directors
- Acquiring a part of the excess capital with regards to their shareholdings in the event that a company is dissolved
Note: Companies limited by guarantee have guarantors and a “guaranteed amount” instead of shareholders and shares.
Any shareholder joining an organisation after its incorporation only needs to provide their full name to Companies House; a contact address is not needed. And don’t forget to note the nominal and market value of a share and to subsequently understand the benefits/drawbacks of issuing a specified number of shares for your shareholding company.
If you want to find out more about shares and shareholders and what they mean for your business, contact our professional and experienced company formations team now for fast, friendly, and comprehensive advice.