Shares are essentially pieces of stock that can be issued to investors to
help companies to raise funds. You can issue more shares at any time once your company
has been incorporated, and you need to update your company information by completing a
Return of Allotment form for Companies House. This may sound like a sure-fire way to
generate some much needed money to help the company expand or improve conditions to
allow for better productivity, however it is like selling a piece of itself over for
ownership by someone else.
Stocks can be sold on many times, and the price will
be reflected by changes in demand for it and the value of the company that originally
issued it. There are advantages and disadvantages to issuing shares, and you have to way
up the pro's and con's before you decide to sell.
Some advantages of issuing more shares
Raising Capital: This has to be the main advantage for issuing more
shares. A company can raise capital by taking on money from venture capital firms or
taking out business loans, but selling stock is going to be a much more cost effective
and pain-free way of raising funds because there will be no interest to pay on the
capital they raise. The investors who buy up the shares do not expect to be paid back,
unlike private investment firms do. This type of share issue can be vital for a start-up
company that has no credit history to rely on, and will find it next to impossible to
get business loans and financing without the owners issuing a personal guarantee of the
loan.
Reduced Debt: Issuing shares is a good way for a company to avoid taking on
debt from loans and financing. Sometimes a company's operations will need more
money to finance than they have, and they risk going into debt. Issuing shares to
investors is a way to prevent this from happening, and in the long term the company will
avoid debt and interest payments as well as make their company look to be more
financially secure and trustworthy.
Before issuing shares, a company has to be
legally entitled to be able to issue them in accordance with its articles of
association. Issuing of extra shares will require a resolution to be passed by a general
meeting of the company shareholders. The only way of avoiding diluting the company
further by issuing shares to new investors is by existing shareholders taking up the
extra shares on top of their own. This would help ease a situation where there is a
genuine concern over the loss of control of the company.
Some disadvantages of issuing shares
Obviously by selling off stock to investors, you are going to be dividing
the profits that are being generated by the company. The more shares you issue, the
wider the pool of investors you will have taking a share of your company profits. The
company's original owners will be the main ones to suffer because they will be
losing much of the profits they would have earned through revenues otherwise. There may
be a little bit of resentment in the ranks as the core founders see all their hard work
and effort to build the company from scratch being sold off through shares.
Loss
of Control: Issuing shares to investors means that they become part owners of your
company. This will give them a say about how the company is run, and you may find your
ideas being disagreed with and disputed by shareholders. New shareholders will be given
legal rights that can limit the flexibility of the business to follow a plan of action
or explore a different path. Loss of control is sometimes hard to come to terms with,
and adjusting to becoming answerable to your fellow shareholders and surrendering a
certain amount of control to others can be very stressful.
Different kinds of shares
Company shares are not all uniform pieces of stock. There are many different
kinds of shares that companies can choose to issue to raise capital, and they can apply
different terms to those shares.
Ordinary shares are issued to raise capital and
are considered to be permanent funding, which means that they cannot be repaid under
normal circumstances. However, a company can purchase its own shares to redeem them,
either privately or in the market to keep the control of the company with it's
existing shareholders.
Preference shares can be issued that leaves the control in
the hands of the original shareholders. To an outside investor these shares can often be
quite unattractive, but it would make them easier to redeem further down the
line.
Corporate bonds are another type of share that can be issued to obtain
loans from banks and other financiers. There can be advantages and disadvantage to this
sort of share issue, and smaller businesses may struggle in this area and will have to
resort to bank loans and business finance from other lenders.
More established
companies can be successful with issuing Corporate bonds, and they are pretty
straightforward to understand. Bondholders only expect the repayment of what is owed to
them, knowing that they don't carry rights to involve themselves with anything else
within the company. Any profits go to the company shareholders rather than the
bondholders themselves.
The downside of issuing corporate bonds is that a company
has to meet their terms exactly. Failure to adhere to the terms can be met with severe
consequences. Prompt payment of interest on time, and adherence to any bond covenants
will prevent the company falling into default.
Overall there are many advantages
and disadvantage to issuing and reissuing shares, and each company will have to look
closely at the details and see how it will affect your company in the long-term before
deciding on issuing shares.
How to complete a Return of Allotment of Shares Form
Once you have issued more shares you have one calendar month to complete and deliver a ‘Return of Allotment’ (Form SH01) to Companies House.
You will need to complete the following information on this form:
- Full company name.
- Your company registration number.
- The date or dates of allotment, if you issued shares on different days.
- The details of the allotted shares – class, quantity, currency, nominal value, amount paid or unpaid on each.
- Details of any non-cash payments, for example if you issued shares in exchange for goods or services.
- Statement of capital detailing the company’s total issued capital at the date of the return.
- Prescribed particulars attached to each share.
- Authorising signature on behalf of the company.
You can deliver the Return of Allotment form online via the Companies House WebFiling
service, or if you formed your company through Your Company Formations, you can do this
through your online account with us.
At this point you do not need to submit the
names of your new shareholders or members right away. However, this information should
be included on your next annual return so your records can be updated with Companies
House.
Companies House will update the public record with your new shareholder
information when you submit your annual return, but you can update your shareholder
details sooner than this if you wish by filing an early annual return. Some shareholders
may be happy to wait, but some may request an early update.
When you issue your
new company shares, they should be acknowledged with a share certificate. Copies of the
share certificates should be kept on file, and your statutory company records should be
updated with the details of the new share allotments and new shareholders or members.
