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.