For Limited Companies, ownership is organised through Shares. Shares determine how much of a say you have in decisions about the company, can determine how much you can take in dividends, and can even give you special rights and responsibilities for running the business.
So what are shares, exactly? How do they work? And how should you organise shares in your Limited Company? This guide tells you everything you need to know.
What are shares?
A share is a token of ownership, and each one represents a vote in the company concerned. Any individual shareholder can have just one, or many.
Because Limited Companies are legal entities, it’s the shares that determine who owns the company. How much of the company you own is determined by how many shares you own relative to the total number of shares that exist for that company.
It also makes it easier to transfer ownership of a company, as shares can be bought, sold or transferred.
What are shares for?
Shares set out people’s level of ownership of a company, as well as how much of a say you have in running that company.
As every share counts as a vote in the company, the more shares you have the more votes you have – for example, a person with 5 shares can out-vote a person with 4 shares.
This weighting is based on the proportion of shares owned though, not the number. So for example, if you issue 100 shares and have two shareholders with 50 shares each this is exactly the same as issuing 10 shares and each shareholder having 5.
Shares may also carry the right to dividends and may allow the individual shareholder to benefit from the sale of the company.
What are shares worth?
Each share has a “nominal value”, which is usually £1 – but that has no bearing on the true value of the share or of the company.
For instance, a company with a “nominal capital” of £1,000 represented by 1,000 shares may be sold for £200,000, in which case those ‘nominal’ £1 shares would have a ‘real’ value of £200 each.
What is a dividend?
A dividend is a payment made to the shareholders of a company in proportion to the number of shares held. So usually, if you own 30% of the shares of a company, you would be entitled to 30% of the dividend payout
Dividends are not paid automatically; it is the decision of the board of directors whether a dividend will be paid in a particular year, and how much will be paid per share. This decision will normally be made on the basis of the company’s profits.
However, shares are not always created equal, and certain classes of share can be created with less entitlement to dividends.
Shares and voting rights
Shares give you voting rights at general meetings, and as a shareholder typically the weight of your vote depends on the proportion of shares you own.
For example, let’s say there’s a company represented by 100 shares, and they are held by 3 shareholders.
- Shareholder 1 has 40 shares
- Shareholder 2 has 30 shares
- Shareholder 3 has 30 shares
The relative weight of their votes means that shareholder 1 has the most power, but can be overruled if both shareholders 2 and 3 vote against them.
Another complication is that shares are not always created equal. Certain classes of shares can be created which give additional or restricted voting rights
What are the different share types?
You can set up different types of shares which carry different rights and values. Common share types include:
Ordinary: As the name suggests these are the ordinary shares of the company with no special rights or restrictions.
Preference: These shares normally carry a right that any annual dividends available for distribution will be paid preferentially on these shares before other classes.
Differential share rights/values: It is also possible to customise the rights of ordinary shares to create differential voting and/or dividend rights. Commonly, this is done by creating A, B and C shares (and so on) out of the ordinary share stock, with each share class being allocated rights as required.
If you’re setting up different share types, they will need to be specified in your company’s Articles of Association, and it’s essential that they’re defined as clearly and simply as possible.
Who can own shares in a Limited Company?
Anyone can hold shares in a Limited Company, including people who also work in the company and receive a salary.
Who can own shares in a Private Limited Company (PLC)?
A private company is normally restricted to issuing shares to its members, to staff and their families and to debenture holders. However, by private arrangement, the company may issue shares to anyone it chooses. Shares in a Private Limited Company may only be sold or transferred with the permission of the directors.
Is there a maximum and a minimum share capital?
There is no maximum to any company’s authorised share capital and no minimum share capital for Private Limited Companies.
Must shareholders pay for their shares?
In a Private Limited Company there is no obligation for the shareholders to pay for the shares they own.
If the company decides that its shares should be ‘paid up’ then payment for those shares is made into the company’s own funds and those payments must be available.
If shares are ‘paid up’ and the company subsequently goes into liquidation, there may be no further claim on the shareholders, although a director may be liable to further claims if it can be shown that they acted illegally, negligently or irresponsibly.
If shares are not ‘paid up’ and the company goes into liquidation due to debt, the shareholders will be required to pay the creditors the value of the shares that each shareholder owns.
How many shares should I issue?
We do not advise you to issue many shares, as the number of shares increases your liability. In fact, a Limited Company is usually created with the fewest number of shares possible to accurately divide ownership.
That’s because it keeps everything as simple as possible to start with. Additional shares can easily be created if the company brings in new shareholders or changes ownership ratios, so it’s best to start simple and you can change things down the line if needed.
A company must maintain a register of shareholders and shareholdings, which must be kept up to date and included in your annual Confirmation Statement to Companies House.
This must include details of any new shares created, or transfers of shares, as well as details of all shareholders.
Any time you create new shares, you will need to fill out an SH01 Allotment of Shares form and send it in to Companies House within a month of allocating the new shares.
Are shareholder details a matter of public record?
Yes, not only are these details available at Companies House, but all Limited Companies are required to make the information available if a member of the public asks for them.
However, you can keep shareholders’ addressses off the public register with products like a Service Address, which is very useful if your shareholders don’t have a public address they can use.
Need help allocating shares?
If you’re not sure how to set up your Limited Company with an appropriate number of shares, then Duport can help you out! Our quick online formation process makes it all really simple.
An if you need a little extra help, our expert team can talk you through all the essentials, including how to ensure your Articles of Association correctly set out all the required information about shares and shareholders.