How many shares should I issue when I forming a company?
When forming a company limited by shares, you must issue at least one share per shareholder. These shares represent ownership and control of the company. But how do you determine the right number of shares to issue during formation? Is one share per person sufficient, or should you issue more? Let’s explore.
Issue at least one share when forming a private limited company
When forming a company, deciding how many shares to issue is one of your first decisions. The number of shares primarily depends on the number of shareholders the company has or plans to have.
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If you’re the sole shareholder and director, you only need to issue one share. However, if the company will have multiple shareholders, you must issue at least one share to each. You can also issue more than one share per shareholder, either during or after incorporation, depending on your future flexibility needs. For instance, you might want to:
- Sell shares in the future to bring in new partners or raise capital.
- Transfer some of your shares to business partners once the company is more established.
- Transfer shares to family members like your spouse or children.
Issuing more shares than necessary at incorporation allows you to transfer them (by selling or gifting) when needed. This process is typically quicker and easier than issuing new shares later.
When forming a public limited company
Public limited companies (PLCs) have different rules from private companies. When forming a PLC in the UK, a minimum allotted share capital of £50,000 is required, known as the “authorised minimum.”
A PLC must issue at least £50,000 in shares before it can start doing business or exercising borrowing powers. For instance, if the nominal value of each share is £10, the company must issue at least 5,000 shares. If a PLC reduces its share capital below £50,000, it no longer meets the minimum share capital requirement and must re-register as a private company.
This requirement also applies when a private company re-registers as a PLC under Part 7 of the Companies Act.
Should I issue more than one share when forming a company?
If you’re forming a company alone and don’t plan to bring in new shareholders, issuing just one share to yourself is perfectly fine. This is a common practice in many small businesses.
Issuing fewer shares simplifies the process, makes management easier, and minimizes your liability for company debts.
However, if you plan to sell or transfer shares in the future, consider issuing more shares at the outset. You’ll retain ownership until you’re ready to transfer them to new shareholders.
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Issuing shares in quantities like 10, 100, or 1000 is a common approach because these numbers are easily divisible. This makes it easier to adjust ownership percentages based on factors like investment, control, or involvement in the business.
If you plan to sell shares to new investors in the future, issuing 100 or 1000 shares offers more flexibility. You can sell small portions of the company, such as 1% or 0.5%, to multiple investors. On the other hand, if you issue only 10 shares, the smallest share percentage you could sell would be 10% of the business, which is a significant portion.
Your shares determine your percentage of ownership
The ownership of a company limited by shares is divided into shares, and each share represents a percentage of the company. Owning shares means owning a portion of the business.
Example 1:
- You form a company with only one shareholder (you) and issue one share.
- This share represents the entire company.
- You own 100% of the company.
Example 2:
- You form a company with one other person and issue 10 equal-value shares.
- Each share represents 10% of the company.
- You both take 5 shares each, owning 50% each of the company.
Example 3:
- You form a company with three other people and issue 100 equal-value shares.
- Each share represents 1% of the company.
- You each take 25 shares, owning 25% each of the company.
Example 4:
- You form a company with three other people and issue 100 equal-value shares.
- You contribute 70% of the startup capital, and the other shareholders each contribute 10%.
- To reflect the contributions, you take 70 shares, while the other shareholders take 10 shares each.
- You own 70% of the company, and the other shareholders own 10% each.
Every share issued must have a nominal value, typically £1. This is the amount shareholders agree to pay for their shares when they are issued. The nominal value determines the ‘limited liability’ of shareholders, meaning this is the maximum amount they may need to contribute if the company becomes insolvent and cannot pay its debts.
Keep this in mind when deciding how many shares to issue: the more shares you issue, the higher the potential liability for shareholders. For example, if you issue 10,000 shares with a nominal value of £1 each, the shareholders would be collectively liable for up to £10,000 if the company cannot pay its debts. It’s best to avoid issuing significantly more shares than necessary to keep the liability manageable.
Is there a maximum number of shares a company can issue?
Until 2009, UK companies limited by shares were required to specify their authorised share capital in the memorandum of association. This capital was stated as a sum of money divided into a set number of shares with a fixed value. For example, £100 divided into 100 shares at £1 each, representing the maximum share capital the company could have.
However, with the introduction of the Companies Act 2006, this requirement was abolished. Companies are now free to issue as many shares of any value as they choose, unless their members decide to amend the articles of association to include authorised share capital.
Under the Companies Act 1985, the provision was mandatory because Stamp Duty on shares had to be paid to HMRC when a company was formed. As a result, many companies kept their authorised share capital at a reasonable level, such as £100.
Now, Stamp Duty on shares is only payable when shares are purchased electronically or when the sale value of a share transfer exceeds £1,000.
Can shares be held jointly?
With the exception of subscriber shares, two or more people can co-own the same share(s). Joint shareholders are becoming more common, especially in Right to Manage or flat management companies.
There is no statutory restriction on joint shareholders, but some companies may prohibit them under their articles of association or a shareholders’ agreement. In some cases, companies may restrict the maximum number of shareholders who can jointly own shares.
Do you have any other questions?
In this article, we covered the key considerations when deciding how many shares to issue when forming a company. Whether you’re forming a private or public limited company, understanding share issuance is essential to your business’s structure and future growth.
For more details, visit the Startxpress Help Center and Blog. If you need additional assistance, feel free to contact us at support@startxpress.io!
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