Every limited company must have at least one share when it is formed.
For many small companies, this may be a single £1 share, while larger or investor-backed businesses may issue thousands of shares to raise finance.
The value of these shares is known as the company’s share capital.
Shareholders provide this capital in return for ownership of the company.
For some businesses, it is simply a token amount put in by the founders, while for others, it is a more substantial sum raised from external investors to fund growth. Whatever the level, shareholders hope that the value of their shares will increase over time.
Shareholders come in various forms. Groups of shareholders often include founders who use their own cash to finance the business, while others are individuals or organisations who become involved as the company expands.
In this article, we look at what share capital is, the rules that apply to UK limited companies, and the different types of shares you can issue.
Contents
- What rules must I follow?
- How can I change my company’s share capital?
- Classes of shares
- Three kinds of share rights
- Types of shares
- Converting shares to a different class
- Proceed with caution
What rules must I follow?
It’s compulsory to have at least one share. For many small companies, it’s normal to opt for Ordinary £1 shares, as this prevents complications or unnecessary administration work.
It used to be the case that limited companies were required to declare a total share capital figure when they first registered and specify a limit on the number of shares the firm would have.
The term for the total value of your company’s shares is issued share capital.
For example, if you opt for the £1 share option and you issue 2,500 shares when you first launch, your initial issued share capital would be £2,500. But, due to the Companies Act 2006, this is no longer compulsory.
Now, you can simply issue an initial statement, then go ahead and raise the total number of shares if you need to.
While you’ll still need to update your Articles of Association, the process is much easier than it was before – a change that is particularly helpful if, for example, you acquire a new investor.
How can I change my company’s share capital?
There are all sorts of reasons why you might want to change your company’s share capital, so making edits to the composition of shares in issue is relatively simple.
When you first register your business at Companies House, you’ll indicate on your Statement of Capital form what sort of shares the firm is using.
For example, you’ll need to specify the voting rights each type of shareholder will have, as well as whether the shares are unpaid (where the investor pays later) or paid up (where the investor pays immediately upon purchase).
If these details change, you’ll need to notify Companies House. Companies House has designed various forms to cover all eventualities, so it’s simply a matter of finding the relevant form and completing it.
For example, if you decide to reduce the number of issued shares, you’ll be required to fill out sections 644 and 649 of Form SH19. Your accountant or adviser can assist you if this causes any issues.
You’ll also need to declare a Statement of Capital with your Confirmation Statement, so it’s a good idea to keep the information up to date and easily accessible.
Classes of shares
When the concept of issuing shares in an enterprise as a means of raising capital was first introduced, ordinary shares were the norm. That was back in 1602, when the Dutch East India Company first issued paper shares to fund their trading ambitions.
Today, many companies still have just one class of shares – ordinary shares. However, there are many different classes of shares, and even ordinary shares can have different features.
Modern companies can create different classes of shares to attract investors, remunerate staff, and so on, provided they set out the rights attached to them in the rules governing the company, as outlined in the Articles of Association.
Three kinds of share rights
Shares can differ in the rights they give their owners:
- Voting rights – the right to vote on company matters, e.g. appointment of directors.
- Dividend rights – entitlement to normal or preferential dividends (or none at all).
- Capital rights – entitlement to any remaining assets if the company is wound up or sold.
Types of shares
Ordinary shares
The majority of companies in the UK have ordinary shares where each share carries a vote, and a portion of the company’s earnings (dividends) is paid in cash, stock or other property.
Ordinary shares can also have different classes, allowing directors to pay different dividends to shareholders or to issue shares with varying nominal values.
Deferred ordinary shares
These are used to defer payment of a dividend until other classes of shares receive a minimum dividend first.
Non-voting shares
As the name suggests, such shares carry no voting rights, including the right to attend the company AGM. They are often issued as a tax-efficient means of remunerating staff, as well as giving them a real stake in the company.
Redeemable shares
These are issued on the basis that the company has the option to repurchase the shares at a future date, either fixed or determined by the directors.
They are often issued to staff and can be taken back for their nominal value if the employee leaves the company.
Management shares
This class of shares carries additional voting rights in order to retain control of the company. For example, each management share may carry ten votes, allowing the founders to maintain control even if other shares are issued to investors.
Preference shares
This type of share has a preferential right, expressed as a percentage, on a fixed amount of dividend. For example, a £1, 5% preference share will have a dividend of 5p per year, but only payable from profits.
The dividend can be either cumulative or non-cumulative and is typically limited to a fixed amount.
Converting shares to a different class
It’s possible to convert shares from one class to another, provided the agreement of the shareholders affected by the proposed change is obtained.
The wiser course is to pass a resolution so that all shareholders consent, in case their rights are affected in practice.
Proceed with caution
The list above is not exhaustive, and it’s important to proceed with caution before creating new share classes or issuing shares.
Class rights are a complex area, and you should only proceed after seeking professional advice on the implications, including tax treatment, and understanding how they can benefit your company and shareholders.
As ever, we recommend you talk to an accountant if you have any questions about share capital or shareholdings.
