Share capital basics: everything company directors need to know

To get a business off the ground, it’s vital to have some cash to get it going and give it momentum.

That’s where shareholders come in: by investing in return for a portion of ownership, they hope for a future higher value of the shares they now own.

The nominal value of shares issued by a company forms its share capital.

Shareholders come in many forms. Groups of shareholders almost always include founders who finance their businesses with their own cash, while others are external individuals who get involved as the business grows.

Shares do not always have to be paid for in cash immediately. They may be partly paid, unpaid or, in some circumstances, issued for non-cash consideration.

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 for a company limited by shares to have at least one share. For many small companies, it’s common to opt for Ordinary £1 shares, as this avoids complications and unnecessary administrative work.

It used to be the case that limited companies were required to declare a total authorised share capital figure – a maximum limit on shares – when they first registered.

However, the Companies Act 2006 abolished the concept of authorised share capital from 1 October 2009. This means there is no longer any general requirement to specify a maximum number of shares a company can issue.

The term for the total nominal value of your company’s shares that have actually been issued (allotted) to shareholders is now simply issued share capital or allotted share capital.

For example, if you opt for the £1 share option and issue 2,500 shares at launch, your initial issued share capital would be £2,500.

Now, you can simply issue an initial statement of capital and allot additional shares if needed, subject to the company’s Articles, any required authority to allot shares and any applicable pre-emption rights.

For a private company with only one class of shares, directors generally have statutory authority to allot further shares unless the Articles restrict that power. Other companies may need shareholder authority under section 551 of the Companies Act 2006.

You’ll also need to check the Articles of Association before creating new share classes or making other changes to the rights attached to shares.

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.

When you first register your business at Companies House, you’ll indicate on your Statement of Capital what sort of shares the company is using.

For example, you’ll have to specify the rights attached to each class of shares, as well as the amounts paid and unpaid on the shares.

If these details change, for example because you allot new shares, you’ll need to make the appropriate Companies House filing.

For example:

• To allot new shares, use Form SH01 and file it within one month of the allotment.
• If you reduce the company’s share capital, you may need to file Form SH19, together with the other documents required for the reduction procedure being used.

Your accountant or adviser can help if this causes any problems.

You’ll also need to confirm or provide an up-to-date statement of capital with your annual 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 classes available.

Ordinary shares are the most common type. The rights attached to them depend on the company’s Articles, but they commonly carry voting rights, dividend rights and a right to share in capital on a winding-up.

Preference shares usually give their holders priority over ordinary shareholders for dividends or repayment of capital, according to the rights attached to the particular class.

Cumulative preference shares allow unpaid preference dividends to accumulate and become payable in future, subject to the terms of the shares and the company having sufficient distributable profits.

Redeemable shares are issued on terms which allow or require the company to redeem them in the future. The shares must be fully paid before redemption, and the company must follow the statutory rules governing how the redemption is financed.

Find out more in our guide to the different types of share classes.