A guide to limited company shares
Company shares are portions of ownership in a limited company. Each one represents a percentage of the company and they are owned by one or more individuals and/or corporate bodies known as ‘shareholders’, or ‘members’.

The quantity and value held by each member determines how much control and voting power they have in the business, as well as their profit entitlement and the limit of financial liability for debts. Like all forms of property, shares can be transferred or sold to other people.

Contents:

1. The different types of shares.
2. How many shares do I need to issue?
3. Can I issue different share classes?
4. What is the share capital of a company?
5. What are issued shares?
6. What value should I make my shares?
7. When do I have to pay for my shares?
8. Can a company issue unpaid shares?
9. What are the prescribed particulars?
10. What voting rights are attached to ordinary shares?
11. Can I issue shares without voting rights?
12. What is a statement of capital?
13. Keeping a record of company shareholdings.
14. What is a share certificate?

1. The different types of shares

The majority of companies issue standard ‘ordinary’ shares. This keeps things simple by offering equal rights and responsibilities to all shareholders. The rights attached to shares, which include voting rights, dividend rights and capital rights, are specified in prescribed particulars in the statement of capital and articles of association.

It is possible to issue different types of shares. This is often required when the owners wish to distinguish the value of their shares and the various rights attached to them. Different types, or ‘classes’ include:

Preference share

These carry the preferential right of certain owners to receive a fixed percentage of profits before others. In some cases, they also offer the preferential right to capital distribution before other classes. As a result, however, they often carry no voting rights.

Non-voting shares

Typically issued to family members of the main shareholders, or to employees as part of a share scheme. This class enables existing members to maintain full control of the company whilst distributing a portion of profits to other people in a tax-efficient way.

Transferring and issuing company shares

An employee scheme is an effective way to align the interests of staff with a company’s values and objectives. The potential reward from their vested interest can motivate staff to work harder. Dividends from non-voting ordinary shares can be used as a tax-efficient way to pay part of an employee’s salary.

Redeemable shares

This class enables a company to buy back its issued shares after a fixed period of time. Often, they are created for employees and issued with the provision of being taken back if an employee leaves the company. They are often non-voting.

Alphabet shares

These are usually ordinary shares that are divided into different sub classes, such as ‘A’, ‘B’ and ‘C’. This allows a company to vary the percentage of each prescribed particular. Example:

  • A company has two owners. They each hold one share but contribute different amounts of capital to the business.
  • One owner is given 50% voting rights, 50% dividend rights and 70 % capital rights.
  • The other owner is given 50% voting rights, 50% dividend rights, and only 30% capital rights to reflect his or her smaller capital contribution upon company formation.

Management shares

These carry a smaller nominal value than other classes and/or provide multiple voting rights. They are often held by the original members as a way to retain more control of the business than newer members.

Deferred ordinary shares

Offer dividend rights to the holder only after dividends have been paid to all other members who hold different share classes.

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2. How many shares do I need to issue?

Private limited companies must issue one or more shares when they are incorporated at Companies House. Each member must agree to take at least one share. 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 shares it can issue during and after incorporation.

Benefits of issuing more than 1 share

If you intend to grow and expand your business or bring in a partner at some point in the future, you may wish to issue more than one share when you register your company. This will allow you to sell some of them when required. Provided you continue to own over 50% of the business, you will retain overall ownership and control whilst bringing in new members and raising capital.

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. This is an important consideration for creditors, investors, clients and suppliers, all of whom want to feel confident about the viability and security of any business they become involved with.

Why do many companies issue 100 shares?

Many choose to issue this quantity because each unit represents 1% of the business. It also allows a company to issue small portions of ownership to lots of different people, rather than large portions to only a few people.

Aside from these practicalities, issuing 100 shares has historical significance. Before the introduction of the Companies Act 2006, private limited companies were legally required to restrict their issued capital to a fixed amount. This was known as ‘authorised share capital’ and it determined the Stamp Duty they had to pay to HMRC upon company formation.

100 was the quantity chosen by most firms because it kept their Stamp Duty liability to a reasonable sum whilst allowing them to issue an acceptable number of shares during and after incorporation.

What is a company shareholder?

Whilst this restriction is no longer mandatory and there is no need to pay Stamp Duty to HMRC in such instances, you can still choose to include the provision in your articles of association.

Disadvantages of issuing too many shares

Whilst it can be advantageous to issue more than one to each initial member, it can also have its downside. If a company is dissolved or unable to pay its bills, the nominal value of all issued shares (normally £1 each) must be contributed to the business. The more you issues, the more you and the other members (if any) have to pay in such instances.

For example, if you were to issue a quantity of 1000 or 10,000, the collective liability of the members would be at least £1000 or £10,000 if your business got into financial difficulty. This is a significant liability, especially for a company owned by only one or two people!

3. Can I issue different share classes?

A company can issue ordinary or multiple types of shares during and after incorporation. Companies that issue only ordinary ones can simply adopt the Model articles of association from Companies House.

To register any class other than ordinary, you will have to amend the Model articles to reflect the prescribed particulars of rights attached to each class.

If a company wishes to issue different classes after incorporation, the members must pass a resolution to amend the articles to include the different prescribed particulars.

4. What is the share capital of a company?

This only exists in companies limited by shares because companies limited by guarantee do not issue shares. When a limited company is incorporated, it will decide how many shares to issue. Each member will then agree to take a certain quantity. The total nominal value of these issued shares creates ‘share capital’.

Example: You issue a quantity of 100, each with a nominal value of £1. The total share capital is £100.

The owners of a company are required to pay the nominal value of their share(s), either at the time of company formation or at a later date. This is the limit of their financial liability. Thus, the total capital of a company determines to collective liability of its owners.

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5. What are issued shares?

This refers to the total quantity created and issued by a company during and/or after incorporation. There minimum requirement is one. There is no upper limit unless the articles of association contains a provision of authorised share capital.

6. What value should I make my shares?

Shares each have a nominal value, which is normally £1. The nominal value differs from the actual value, i.e. if they are sold. You can attach different nominal values if you wish, and you can vary the values of different classes.

The nominal value of shares creates the total nominal capital of a company and its owners. Shares are either paid for at the time they are taken, or they can be paid at a later date.

A nominal value of £1 or less per share is preferred because it limits each member’s liability to a reasonable sum. The nominal value should also be considered when deciding on the total number to issue. More issued shares = higher financial liability.

7. When do I have to pay for my shares?

You can pay for them as soon as they are issued. This is often preferable because most are issued or transferred for the purpose of raising capital for the business. However, there is no legal requirement to pay for them immediately, unless you are asked to do so.

If a company is unable to pay its bills or is wound up, the owners of the business are legally required to pay for any unpaid shares immediately.

In most cases, they are paid for in cash, but it is possible to pay part-cash and part non-cash in goods, services, knowledge, expertise or property. They can also be given in goodwill, issued as part of an employee scheme or gifted to family members.

8. Can a company issue unpaid shares?

When shares are issued during or after company formation, the director should state whether some or all of them need to be fully paid at that time. The majority of companies require full payment when they are issued, but it is also possible to leave them partly paid or unpaid.

If full or partial payment is not required upon issue, members are legally liable to pay the nominal value at the request of the company. This request is known as a ‘call notice’.

Why would I issue unpaid shares?

Companies may choose to issue partly-paid or unpaid shares for a variety of reasons:

  • To set up an employee scheme.
  • To retain the option to forfeit them from members.
  • Due to a member’s lack of funds at the present time. An individual may be allowed to defer payment until a later date, or pay in instalments until the balance is met.
  • The capital is not required to set up or run the business.
  • The company does not have or require a business bank account at the present time; therefore, no payments will be taken until a later date.
  • As part of a strategy to implement a merger or acquisition.
  • To restrict voting rights.
  • To reduce dividend payments.

Any private company that plans to offer unpaid or partly-paid shares will require altering the model articles to include a provision that authorises part-payment and non-payment upon issue.

Any payments received for the nominal value should be transferred into the business bank account because this money must be accounted for and fully traceable at all times.

If any units are issued at a price in excess of their nominal value, the difference between the nominal and actual value is known as a ‘premium’. This sum must be transferred into a separate account known as a ‘the share premium account’.

9. What are the prescribed particulars?

Prescribed Particular Example

Prescribed particulars are required as part of the statement of capital. Limited by shares companies have to complete this when they are incorporated and when they file an annual confirmation statement (formerly the annual return).

The particulars detail the rights attached to shares. They are set out in the Companies (Shares and Share Capital) Order 2009. The particulars can vary between companies and different classes of shares but, essentially, they will stipulate the specific entitlements and degree of power that each share bestows upon the person who owns it.

Adding and removing company shareholders
The particulars must correspond with the details contained in the articles of association. The majority of companies issue ordinary shares and adopt Model articles from Companies House. In such instances, the following standard prescribed particulars of rights will be attached to each unit:

  • Voting rights, including voting rights in exceptional circumstances.
  • Dividend rights. i.e. the entitlement to receive distribution of profits through dividend payments.
  • Return of capital.
  • Redeemable rights.

Filing prescribed particulars with Companies House

Prescribed particulars must be filed at Companies House in a variety of situations, including:

  • Incorporation with Companies House.
  • Upon delivery of an annual confirmation statement.
  • The allotment (issue) of more shares.
  • The creation of a new share class.
  • Alteration of rights of a particular class.
  • A reduction of issued capital.
  • Redemption of redeemable shares.
  • Re-denomination of capital.
  • The consolidation or sub-division of shares.
  • An unlimited company being incorporated as a limited company.
  • The cancellation of shares when a company purchases its own shares.

Bespoke particulars must be drawn up by a company that issues any class other than ordinary. The rights attached to each class will therefore vary. Members must collectively agree on the prescribed particulars to attach to each class, or to different shares of a particular class.

Whilst the prescribed particulars are outlined in the articles, any company with varied or complex share rights must provide a summary of these rights in every statement of capital. You cannot simply refer Companies House to the articles.

10. What voting rights are attached to ordinary shares?

The rights are outlined by the prescribed particulars. These rights can vary considerably. For most companies, however (the majority of which adopt Model Articles from Companies House), an ordinary share will carry one vote. This enables the holder to cast a single vote at general meetings for every one he or she owns. Therefore, members who own multiple shares will have more voting power than those who own fewer.

In addition to voting rights, ordinary shares usually carry equal dividend rights (the right to a portion of profits) and equal capital rights (the right to a portion of surplus capital if/when the business is wound up). This means each member will be entitled to an equal distribution of profits and surplus capital in relation to their percentage of ownership.

11. Can I issue shares without voting rights?

It is possible to issue different classes during and after company formation, so you can vary the rights attached to each one, including the right to vote.

The most common classes without voting rights are ‘non-voting ordinary’ and ‘preference’. These two classes are often issued to members who take less financial risk in the company. As a result, these individuals are not entitled to vote at general meetings, but they are entitled to receive a portion of profits.

12. What is a statement of capital?

A statement of capital is a document that provides a snapshot of information about the issued shares in a company at a given time. A statement of capital must be completed when a private limited company is incorporated at Companies House, when confirmation statements are filed and whenever certain forms are submitted regarding a change of capital, such as:

  • Allotments.
  • Re-denomination.
  • Reduction of capital resulting from re-denomination.
  • Notice of consolidation, sub-division, redemption, or re-conversion of stock into shares.
  • Cancellation of re-purchased shares.

For each class, the following details should be included in a statement of capital:

  • Prescribed particulars of rights (voting rights, dividend rights, capital rights, option to redeem).
  • Total number of issued shares of that class.
  • Aggregate nominal value of that class.
  • The amount paid or due to be paid on each unit.

How to deliver a statement of capital

A statement of capital (Form SH19) can be delivered to Companies House online along with the application to register a company (Form IN01). It should also be filed online with an annual confirmation statement (Form CS01), a Return of Allotment (SH01) and any other form that deals with capital. All of these documents can be filed via WebFiling or 1st Formations free Online Company Manager. A Return of Allotment, and certain other forms relating to changes to capital, must be delivered via WebFiling.

13. Keeping a record of company shareholdings

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Limited companies must keep a record of all issued shares and the people who own them. The details of the first members and the shares they have taken will be recorded in the memorandum of association and statement of capital. This information is registered at Companies House and placed on public record. Companies must also record this information in their statutory records at their registered office or SAIL address.

Any members who join a company after incorporation should be given a share certificate. The company should keep a copy of these certificates. Members’ details must also be added to the statutory register of members and the PSC register (if applicable).

When existing shares are transferred from one person to another, a stock transfer form should be completed. A copy of this form should be maintained with the company’s statutory records. Companies House should be notified of the transfer in a statement of capital when the next confirmation statement is filed.

If new shares are issued, the director must file a Return of Allotment with Companies House no later than 1 month after the date of issue, along with an updated statement of capital. There is no need to provide shareholders’ details until the company files its next confirmation statement.

14. What is a share certificate?

Directors are responsible for providing a certificate to any new member who joins a company after formation. This certificate serves as proof of ownership and it details the number and value of shares held by a shareholder.

There is no legal requirement to issue a certificate to the subscribers because their names and holdings are recorded on the memorandum of association, but it is still commonplace to issue them.

What information does a share certificate contain?

A certificate can be in digital or paper format, and it should display the following information:

  • Certificate number.
  • Number, class, and value of shares held.
  • Name of the company in which they are held.
  • Company Registration Number (CRN).
  • Name and address of member.
  • Amount paid or due to be paid.
  • Director(s) signature.
  • Registered office address.

Free share certificate download

Members should ensure the safekeeping of their certificates because they may be required at some point in the future. The director(s) should also ensure the company keeps a copy of all certificates at the registered office address or SAIL address.

There is no need to provide copies for Companies House. The director(s) will provide Companies House with the details of any new owners when the next confirmation statement is delivered.

By Chris Tapley, Content Writer for 1st Formations.