To get a business off the ground, it’s vital to have some cash to get the enterprise going and give it some momentum. That’s where shareholders come in: by paying cash up front in return for a portion of ownership, they hope for a future higher value of the shares they now own. The cash they pay to buy ownership is known as ‘share capital’.
Shareholders come in lots of different forms. Groups of shareholders almost always include founders who use their own cash to finance their businesses, while others are external individuals who get involved with the business as it grows.
In this article, we’ll take a look at what share capital is and how the rules relate to your limited company.
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 how many 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 implementation of 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, it’s much easier than it was before – a change which is helpful if, for example, you get 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 have to indicate what voting rights each type of shareholder will have, as well whether the shares are unpaid (where the investor pays later) or paid up (where the investor shells out straight away when they buy).
If these details change, you’ll need to let Companies House know. Companies House has designed various forms to cover all eventualities, so it’s simply a case of finding the relevant form and filling it out.
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 help if this causes any problems.
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.
What sorts of shares can I use?
As a limited company owner or director, you might find you need to be flexible in the type of shares you issue. That’s why there’s a wide range of share type choice available to choose from.
Ordinary shares do what they say on the tin: they have value to those who own them, but they don’t come with any extras, or prevent the shareholder from doing anything.
Owners of preference shares, on the other hand, will receive annual dividends before the other, non-preference shareholders do – an attractive option for many investors. If you feel your company might not be able to do this every year, you can opt for the cumulative preference shares option, which gives the firm the right to pay larger sums out in the future.
Redeemable shares place more restrictions on the shareholder, as they mean the company has the right to re-purchase them and take them off the shareholder at a specified point in the future.
Find out more in our guide to the different types of share class.