Back to Basics: Shares in a LTD

So you’ve come up with a killer business idea and have made the decision to incorporate your business, but you’ll be itching to get your business off the ground as quickly as possible.  STOP – it is so important to take some time as decisions you make now can have a massive impact on the future, especially where co-founders are concerned.  Your business structure can affect your ability to raise funds, as well as determining legal ownership, entitlement to dividends and liability should the business fail.

Where do you being?

You’ll need to nominate shareholders and directors, this should not be done lightly as the last thing you want is your business being valued under a matrimonial dispute or the financial security of the business being review due to shareholder/directors debts. So how many shares should you issues? What type? How do you do this, and how much share capital do you need?

Basically, companies are managed by directors and owned by shareholders (members) and you can be both.  Shareholders own a portion of the company limited by shares.  Each shareholder is entitled to receive a portion of profits in relations to the number and value of their shares.

What are shares and the rights attached?

A share is a piece of a company limited by shares, the number of shares held by each member determines how much of the company they own and control. They normally receive a percentage of trading profits that correlates with their percentage of ownership.

Different particulars attached to different share classes are often used to clearly define differing voting powers, share structures, control of decision making and to better reflect ownership of the company.

  1. Voting rights determine how many votes are attached to each share in a show of hands scenario
  2. Dividend rights can vary between shares classes but it is the shareholders right to receive a proportion of dividends issued
  3. Capital/Participation rights refer to the right to participate in a distribution of capital or assets in a situation in which the company is wound up

The different types of shares

  1. Ordinary Shares – This is what the majority of companies issue as it keeps things simple by offering equal rights and responsibilities to all shares hold.
  2. Preference Shares – Preferential right to receive profit before others.  Sometimes the preferential right to capital distribution before other classes. No voting rights.
  3. Non-voting shares – Enables existing members to maintain full control which distributing a portion of profits to others. Typically used as part of an employee share scheme, as this is an effect way to reward their vest interest in the company and can motivate staff to work harder.  Dividends from non-voting ordinary share can be used as a tax-efficient way to pay part of an employee’s salary.
  4. Redeemable Shares – Enables the company to buy back the issued shares after a fixed period of time, or if created for employees when they leave the company.  They are often non-voting.
  5. Alphabet Shares – Usually ordinary shares divided into different sub classes, allowing the company to vary the percentage of each prescribed particular.  Example:
    1. A company has two owners contributions different amounts of capital put both own one share
      1. One owner is given 50% voting rights, 50% dividend rights and 90% capital rights
      2. The other is given 50% voting rights, 50% dividend rights and 10% capital rights
  6. Management Shares – Carry a smaller nominal value or provide multiple voting rights and are often held by founding members as a means of retaining more control of the business than newer members.
  7. Deferred ordinary Shares – often dividend rights in that they are paid after other members.

How many shares do I need to issue?

Private limited companies must issue one or more when they are incorporated at Companies House Each member must agree to take at least one. There is no restriction to the total quantity that can be issued, unless the articles of association contains a provision of ‘authorised share capital’. This is an optional clause that allows a company to restrict how many it can issue during and after incorporation.

Benefits of issuing more than 1 share

You cannot split 1 share and if you intend to grow you business and bring in a partner, at some point in the future, you may wish to issue more shares.  Many companies issue 100 shares because each unit represents 1% of the business and gives the flexibility to issue small portions of ownership to lots of different people, that than large portions to only a few people.

Issuing a higher quantity is also beneficial for creating the image of a substantial, credible and secure business. The nominal value of a company’s issued shares represents the liability of its owners if the business is wound up or accrues debts that it cannot pay.

Where can I find out the share capital?

The shareholders and the numbers of shares each of them has taken up at the point of formation of the company must be stated in the Memorandum of Association.

However, if there have been variations (new issues or transfers), then the best thing to do is check the latest Annual Return, as a full list of members should have been attached. If you do not have a copy of the Annual Return, you can obtain one from Companies House for just £1.

 

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayers’ circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.