A Comprehensive Guide to Understanding Company Shares in the UK
Company shares represent portions of ownership in a company limited by shares, with each share corresponding to a percentage of the business. In this guide, we’ll cover the fundamentals of owning company shares, the various types available, and the rights and responsibilities associated with them.
Shares are owned by individuals or corporate entities, referred to as ‘shareholders’ or ‘members.’ The number, value, and types of shares held by each member determine:
- Their level of control and voting power.
- Their entitlement to company profits.
- The extent of their financial liability for company debts.
As a form of property, shares can be bought, sold, or transferred to others.
Different types of company shares
Most companies issue standard ordinary shares, which provide equal rights and responsibilities to all shareholders. This simplicity makes them a popular choice. The rights attached to shares, such as voting, dividend, and capital rights, are outlined in the prescribed particulars within the company’s statement of capital and articles of association.
However, companies can issue different classes of shares to meet specific needs, particularly when distinguishing the value of shares or rights among members. Here are the common types of company shares:
1. Preference Shares
Preference shares grant certain members the right to receive a fixed percentage of profits before other shareholders. In some cases, they also provide priority in capital distribution. However, they often come with no voting rights.
2. Non-Voting Shares
These shares are typically issued to family members of primary shareholders or employees as part of a share scheme. They allow the main shareholders to retain full control of the company while distributing profits in a tax-efficient manner.
- Employee schemes using non-voting shares can align staff interests with the company’s goals, motivating them through potential rewards.
- Dividends from non-voting shares can also serve as a tax-efficient way to supplement employee salaries.
3. Redeemable Shares
Redeemable shares allow the company to buy back the issued shares after a specified period. They are often issued to employees with the condition that the shares are redeemed if the employee leaves the company. These shares are frequently non-voting.
4. Alphabet Shares
Alphabet shares split ordinary shares into different classes, such as “A” Ordinary, “B” Ordinary, and “C” Ordinary. Each class can have distinct rights, such as:
- Higher voting rights.
- Full capital distribution rights but no voting rights.
- Increased dividend rates but no voting rights.
5. Management Shares
Management shares typically have a smaller nominal value or multiple voting rights. These shares are often held by the original members (subscribers) to retain greater control over the company compared to newer shareholders.
6. Deferred Ordinary Shares
Deferred ordinary shares entitle shareholders to dividend distributions only after dividends have been paid to all other share classes.
By issuing different share classes, companies can tailor ownership structures, voting power, and profit distribution to suit their unique needs and circumstances.
How many company shares do I need to issue?
Private limited companies must issue at least one share upon incorporation at Companies House. Each member must agree to take at least one share. While there is no restriction on the total number of shares a company can issue, this can be limited by an authorised share capital provision in the articles of association. This optional clause restricts the number of shares a company can issue both during and after incorporation.
Benefits of Issuing More Than One Share
Issuing more than one share during incorporation offers several advantages:
- Flexibility for Growth: If you plan to grow your business or bring in partners or investors in the future, issuing more shares allows you to sell some while retaining over 50% ownership. This ensures you maintain control over the company.
- Business Credibility: A higher quantity of shares can create the perception of a more substantial and secure business, boosting confidence among investors, creditors, clients, and suppliers.
- Liability Management: The nominal value of issued shares represents the liability of the shareholders if the business fails or accrues unpaid debts. Having more shares can make this liability distribution appear more structured and credible.
Why Do Many Companies Issue 100 Shares?
Many companies opt to issue 100 shares for practical and historical reasons:
- Simplified Ownership Representation: Each share represents 1% ownership, making it easy to calculate each member’s share of ownership and profit entitlement.
- Attracting Multiple Investors: With 100 shares, the company can issue small ownership portions to numerous investors, rather than larger portions to just a few.
- Historical Context: Before the Companies Act 2006, companies had to declare a fixed authorised share capital, which determined the amount of Stamp Duty payable upon incorporation. Issuing 100 shares minimized the Stamp Duty liability while maintaining flexibility to issue shares later.
Although the authorised share capital provision is no longer mandatory, and companies are not required to pay Stamp Duty on issued shares in most cases, you can still include this clause in your articles of association if desired.
Disadvantages of issuing too many shares
While issuing more than one share to each initial member can offer advantages, it also comes with potential drawbacks. If a company is dissolved or unable to meet its financial obligations, the nominal value of all unpaid issued shares (typically £1 each) must be paid to the business by the members. The more shares issued, the greater the liability for each member.
For instance, if a company issues 1,000 or 10,000 shares, the collective liability of the members would amount to £1,000 or £10,000, respectively, in the event of financial difficulties. This can represent a significant financial burden, particularly for companies with only one or two members.
Can I issue different share classes?
Companies can issue either ordinary shares or multiple share types, both during and after incorporation.
If a company issues only ordinary shares, it can adopt the Model articles of association without modifications. However, to register any additional share classes beyond ordinary shares, the Model articles must be amended or replaced with bespoke articles to specify the different share classes and their prescribed particulars.
For companies with Model articles that decide to issue new share classes after incorporation, members must pass a special resolution to amend the articles of association. This ensures the inclusion of the new share classes and their associated rights.
What is the share capital of a company?
When a company limited by shares is incorporated, the members determine the number of shares to issue. Each member agrees to take ownership of a specific quantity of these shares. The total nominal value of all issued shares constitutes the company’s share capital.
Example:
- You issue 100 shares.
- Each share has a nominal value of £1.
- The total share capital of the company is £100.
Shareholders are required to pay the nominal value of their shares either at the time of incorporation or at a later date, as determined by the company. This payment represents the limited liability of the shareholders – essentially, the maximum amount they would need to contribute if the company becomes insolvent.
What are issued shares?
Issued shares represent the total number of company shares that have been created and allocated to members at any point, whether during or after incorporation. The minimum requirement is one share, with no maximum limit unless the articles of association include an authorised share capital provision.
What value should I make my shares?
Each share has a nominal value, typically £1, which is distinct from its actual (market) value, or the price it would sell for. Companies can assign different nominal values to shares, and even vary the values across different classes of shares.
The nominal value of shares determines the company’s total nominal capital, as well as the liability of its members. Shares can be paid for at the time of issuance or at a later date.
A nominal value of £1 or less per share is often preferred, as it limits each member’s liability to a reasonable amount. This value should also be taken into account when deciding on the total number of shares to issue.
When do I have to pay for my shares?
Company shares can be paid for as soon as they are issued, which is often the preferred method since shares are typically issued to raise capital for the business. However, there is no legal obligation to pay for shares immediately unless the company requests payment. Many companies’ articles of association do not allow for partly paid or unpaid shares after incorporation.
If the company is unable to meet its financial obligations or is wound up, members are legally required to pay for any unpaid shares immediately. In most cases, payment for company shares is made in cash, but it is also possible to pay in part-cash and part non-cash forms, such as goods, services, knowledge, expertise, or property. Shares may also be issued as part of an employee scheme or gifted to family members.
Can a company issue unpaid shares?
When shares are issued during or after a company’s formation, the director must specify whether full or partial payment is required at that time. While most companies require full payment upon issue, it is possible to leave shares partly paid or unpaid.
If full or partial payment is not required at the time of issue, members are legally obligated to pay the nominal value of the shares when requested by the company, known as a “call notice.”
Why issue unpaid shares?
There are several reasons why a company may choose to issue partly-paid or unpaid shares, including:
- To establish an employee share scheme
- To retain the option to forfeit shares from members if needed
- If a member lacks the funds at the moment, allowing them to defer payment or pay in installments until the balance is met
- When capital is not immediately needed to run or set up the business
- If the company does not yet have or require a business bank account to accept payment
- As part of a strategy for a merger or acquisition
Any private company wishing to offer unpaid or partly-paid shares must amend the model articles to include provisions that allow for part-payment and non-payment at the time of issue.
Any payments received for the nominal value of shares must be deposited into the company’s business bank account, as all business transactions need to be properly documented and traceable.
If shares are issued at a price above their nominal value, the difference between the nominal and actual value is called a ‘premium’. This premium must be transferred into a separate account known as the ‘share premium account’.
What are the prescribed particulars?
Prescribed particulars refer to the specific rights attached to company shares. These particulars must be provided as part of the statement of capital, which limited by shares companies are required to complete under the following circumstances:
- Upon incorporation at Companies House
- On the next annual confirmation statement if there have been any changes to share capital since incorporation or the previous statement was filed
- When any other changes to share capital take place
The prescribed particulars are set out in the Companies (Shares and Share Capital) Order 2009 and may vary between companies and different share classes. These particulars essentially define the entitlements and degree of power that each share confers on its owner.
The prescribed particulars must align with the details in the company’s articles of association. Most companies issue ordinary shares and adopt the Model articles from Companies House. In such cases, the standard prescribed particulars for each share will include:
- Voting rights, including rights in exceptional circumstances
- Dividend rights, which refer to the right to receive a share of the company’s profits as dividends
- Rights to a return of capital
- Redeemable rights, if applicable
Filing Prescribed Particulars with Companies House
Prescribed particulars must be filed at Companies House in various situations, such as:
- Upon incorporation at Companies House
- During the annual confirmation statement delivery
- When more shares are issued
- When a new share class is created
- If the rights of a particular share class are altered
- In case of a reduction in issued capital
- When redeemable shares are redeemed
- When capital is re-denominated
- During the consolidation or sub-division of shares
- If an unlimited company becomes a limited company
- When shares are cancelled after being purchased by the company
If a company issues shares that are not ordinary shares, bespoke prescribed particulars must be drawn up. These rights will differ by share class, and members must agree on the prescribed particulars for each class or share within a class.
Any company with complex or varied share rights must provide a summary of these rights in every statement of capital, as Companies House cannot simply refer to the articles of association for details.
What voting rights are attached to ordinary shares?
Voting rights are specified by the prescribed particulars and can differ significantly depending on the company and its share classes. For most companies, particularly those that adopt the Model Articles from Companies House, ordinary shares typically grant one vote per share. This means that members can cast a single vote at general meetings for every share they own. As a result, shareholders with more shares will have greater voting power than those with fewer shares.
In addition to voting rights, ordinary shares generally entitle shareholders to equal dividend rights (a share of the company’s profits) and equal capital rights (a portion of the company’s surplus capital if the business is liquidated). This ensures that shareholders receive an equal distribution of profits and capital in proportion to their ownership stake.
Can I issue shares without voting rights?
It is possible to issue different share classes during and after company formation, as long as the articles permit such changes.
The most common share classes without voting rights are ‘non-voting ordinary’ and ‘preference’ shares. These classes are typically issued to members who assume less financial risk in the company.
Although these members do not have voting rights at general meetings, they are entitled to receive a share of the company’s profits.
What is a statement of capital?
A statement of capital is a document that provides a snapshot of the company’s issued shares at a given time. It must be completed when incorporating a limited by shares company at Companies House and when reporting changes to share capital on the confirmation statement. If filing online, this is automatically handled for you.
Other changes that require a statement of capital include:
- Allotment of shares
- Re-denomination of shares
- Reduction of capital due to re-denomination
- Notice of consolidation, subdivision, redemption, or reconversion of stock into shares
- Cancellation of repurchased shares
For each share class, the statement of capital should include the following details:
- Prescribed particulars of rights (e.g., voting rights, dividend rights, capital rights, option to redeem)
- Total number of issued shares in that class
- Aggregate nominal value of that class
- Amount paid or due to be paid on each share
Most of these documents can be filed through Companies House WebFiling or Startxpress Company Operating System.
Keeping a record of company shareholdings
Limited companies must maintain a record of all issued shares and their owners. The details of the initial members and the shares they took are documented in the memorandum of association and statement of capital, which are registered at Companies House and placed on public record. This information must also be kept in the company’s statutory register, which should be stored at the registered office or SAIL address.
When new members join after incorporation, they must be provided with a share certificate, and the company should retain a copy. Additionally, members’ details should be added to the statutory register of members and, if applicable, the PSC register.
If company shares are transferred between individuals, a stock transfer form must be completed. Member approval should be sought if required, and the board must resolve to accept the transfer. A copy of the stock transfer form should be kept with the statutory registers, and Companies House should be notified of the transfer in the next confirmation statement.
When new shares are issued, the prospective member(s) must submit a letter of application along with the necessary payments. Member approval should be obtained if applicable, and the board must approve the allotment. The directors are required to file a Return of Allotment at Companies House within one month of the issue date, along with an updated statement of capital. Shareholder details do not need to be provided until the next confirmation statement is filed.
What is a share certificate?
Directors are responsible for issuing a share certificate to any new member who joins the company after its formation. This certificate acts as proof of ownership and outlines the number and value of shares held by a shareholder.
While there is no legal obligation to issue certificates to the subscribers (as their details and holdings are recorded in the memorandum of association), it is still common practice to do so.
What information does a share certificate contain?
A share certificate, whether digital or paper, should include the following details:
- Certificate number
- Number, class, and value of shares held
- Name of the company in which the shares are held
- Company Registration Number (CRN)
- Name and address of the shareholder
- Amount paid or due to be paid
- Director(s) signature
- Registered office address
Members should ensure their certificates are kept safe, as they may be required in the future. Directors must also ensure that the company retains copies of all certificates at the registered office or SAIL address.
There is no need to submit copies of the share certificates to Companies House. The director(s) will provide the necessary details of new members when the next confirmation statement is filed.
Do you have any other questions?
In this article, we’ve explored company shares in the UK, covering the different types, issuance process, and key aspects like share capital and prescribed particulars. Whether you’re considering issuing shares or just looking to understand the structure of your business, knowing these basics can help you manage your company more effectively. If you have any further questions about company shares, their rights, or anything else related to company formation and management, don’t hesitate to contact us at support@startxpress.io!
For more detailed guidance, check out the Startxpress Help Center and Blog.
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