Company shares are portions of ownership in a company limited by shares, with each one representing a percentage of the company. In this guide, we will explain the basics of owning company shares, the different types of shares that are available, and the rights and responsibilities attached to these shares.
Shares are owned by one or more individuals and/or corporate bodies known as ‘shareholders’ or ‘members’. The number, value, and types of company shares owned by members determine:
- how much control and voting power they have
- how much profit they’re entitled to
- the limit of their financial liability for company debts
Shares are a form of property, which means they can be bought, sold, and transferred to other people.
Different types of company shares
The majority of companies issue standard ‘ordinary’ shares. This keeps things simple because ordinary shares provide equal rights and responsibilities to all shareholders. The rights attached to company shares, which include voting rights, dividend rights, and capital rights, are specified in the prescribed particulars in the statement of capital and articles of association.
However, it is possible to issue different classes (types) of company shares. This is often required when members want to distinguish the value of their shares and the various rights attached to them. Different types of company shares include:
These carry the preferential right of certain members to receive a fixed percentage of profits before other shareholders. In some cases, preference shares also offer the preferential right to capital distribution before other classes. As a result, however, this type of share often carries no voting rights.
Non-voting shares are 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.
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 are typically used as a tax-efficient way to pay part of an employee’s salary.
Redeemable shares enable a company to buy back its issued shares after a fixed period of time. Often, they are created for employees and issued with the proviso that they are taken back if the employee leaves the company. Redeemable shares are often non-voting.
Alphabet shares are the most common form of multiple shares, such as “A” Ordinary, “B” Ordinary, and “C” Ordinary. They allow companies to separate ordinary shares into different classes by varying the prescribed particulars (rights) attached to them.
For example: one class may have a higher percentage of voting rights; another class may have full rights to capital distribution but no voting rights, and another class of alphabet shares may be entitled to higher rates of dividends but not voting rights.
Management shares carry a smaller nominal value than other classes and/or provide multiple voting rights. They are often held by the original members (aka ‘subscribers’) as a way to retain more control than newer shareholders.
Deferred ordinary shares
Deferred ordinary shares offer dividend distributions to the shareholder only after dividends have been paid to all other members who hold different share classes.
How many company 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 contain a provision of ‘authorised share capital’. This is an optional clause that allows a company to restrict the number of shares it can issue during and after incorporation.
Benefits of issuing more than one 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 company shareholders and raising capital.
Issuing a higher quantity of company shares 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 companies choose to issue 100 shares because each unit represents 1% of the business. This makes it easy to work out each member’s percentage of ownership and profit entitlement. It also allows the company to issue small portions of ownership to lots of investors, 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 that companies had to pay upon incorporation.
100 shares was the quantity chosen by most companies 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.
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 share to each initial member, it can also have a downside. If a company is dissolved or unable to pay its bills, the nominal value of all unpaid issued shares (normally £1 each) must be contributed to the business. The more shares you issue, the higher the liability of each member.
For example, if you were to issue a quantity of 1000 or 10,000 company shares, the collective liability of members would be £1000 or £10,000, respectively, if the business got into financial difficulty. This is a significant liability, especially for a company owned by only one or two people.
Can I issue different share classes?
Companies can issue ordinary or multiple types of shares during and after incorporation.
Companies that issue only ordinary shares can only adopt the Model articles of association. However, if you want to register any class of shares other than ordinary, you will have to amend the Model articles or create bespoke articles to include different classes and their prescribed particulars.
If a company with Model articles of association chooses to issue different share classes after incorporation, the members will have to pass a special resolution to amend the articles to include the new share classes and associated rights.
What is the share capital of a company?
When a limited by shares company is incorporated, the members will decide how many shares to issue. Each member will then agree to take a certain quantity. The total nominal value of all of the issued shares creates the company’s ‘share capital’.
- You issue 100 shares
- Each share has a nominal value of £1
- The total share capital of the company is £100
The members of the company are required to pay the nominal value of their share(s) either at the time of company formation or at a later date (whichever is requested by the company). This represents the limited liability of the company’s shareholders (i.e the maximum amount of money they would need to pay if the company becomes insolvent).
What are issued shares?
Issued shares refer to the total number of company shares that have been created and taken by members at any given time, whether during or after incorporation. The minimum is one share, but there is no upper limit unless the articles of association include the provision of authorised share capital.
What value should I make my shares?
Every share has a nominal value, which is normally £1. The nominal value differs from the actual (market) value – i.e. how much it would sell for. You can attach different nominal values to company shares, and you can vary the values of different classes.
The nominal value of shares creates the total nominal capital of the company and its members. Shares are either paid for at the time they are taken, or they can be paid for 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 of company shares to issue.
When do I have to pay for my shares?
You can pay for company shares as soon as they are issued. This is often preferable because most shares 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 payment is requested by the company. Many companies’ articles do not permit partly paid or unpaid shares after incorporation.
If a company is unable to pay its bills or it is wound up, the members are legally required to pay for any unpaid shares immediately.
In most cases, company shares are paid for in cash, but it is possible to pay part-cash and part non-cash (e.g. goods, services, knowledge, expertise, or property). Shares can also be given in goodwill, 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 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 of shares upon issue, 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, including:
- 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 – the member 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 currently have or require a business bank account to accept payment
- as part of a strategy to implement a merger or acquisition
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 of shares should be transferred into the company’s business bank account. This is because all business transactions must be accounted for and fully traceable at all times.
If any shares 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’.
What are the prescribed particulars?
Prescribed particulars are the rights attached to company shares. They must be provided as part of the statement of capital, which limited by shares companies are required to complete in the following circumstances:
- upon incorporation at Companies House
- on the next annual confirmation statement if any changes to share capital have occurred since incorporation or since the previous confirmation statement was filed
- when any other changes to share capital take place
Prescribed particulars are set out in the Companies (Shares and Share Capital) Order 2009. They vary between companies and different classes of shares. Essentially, however, they will stipulate the specific entitlements and degree of power that each share bestows upon the person who owns it.
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 right to receive a distribution of profits in the form of 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 at 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 the issued capital
- redemption of redeemable shares
- re-denomination of capital
- the consolidation or sub-division of company 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 of share 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 request that Companies House refers to the articles.
What voting rights are attached to ordinary shares?
Voting 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), ordinary shares will carry one vote each. This enables members to cast a single vote at general meetings for every share they own. 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 that each member will be entitled to an equal distribution of profits and surplus capital in relation to their percentage of ownership.
Can I issue shares without voting rights?
It is possible to issue different share classes during and after company formation, provided the articles allow for it.
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 members are not entitled to vote at general meetings, but they are entitled to receive a portion of profits.
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 and when confirmation statements are filed, but this is automatically done for you if these documents are filed online.
Other changes that require a statement of capital include:
- allotments of shares
- re-denomination of shares
- 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 share 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
- the aggregate nominal value of that class
- the amount paid or due to be paid on each unit
Most of these documents can be filed via Companies House WebFiling or 1st Formations’ free Online Company Manager.
Keeping a record of company shareholdings
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 register, which should be kept 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 company shares are transferred from one person to another, a stock transfer form must be completed, member approval should be sought (if required), and the board should resolve to accept the transfer. A copy of the stock transfer form should be kept with the company’s statutory registers. 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, a letter of application by the prospective member(s) should be delivered to the company with the relevant payments, approval of the members should be sought (if applicable), and the board should approve the allotment. The director(s) must then file a Return of Allotment at 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.
What is a share certificate?
Directors are responsible for providing a share certificate to any new member who joins the 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 subscribers because their names and holdings are recorded on the memorandum of association. However, it is still commonplace to issue them.
What information does a share certificate contain?
A share 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 the member
- amount paid or due to be paid
- director(s) signature
- registered office address
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 that the company keeps a copy of all certificates at its 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 new members when the next confirmation statement is delivered.