When forming a company limited by shares, you must issue a minimum of one share per shareholder. These shares determine how much of a company is owned and controlled by each shareholder. But how do you decide how many shares to issue when forming a company? Is one share enough, or should you issue more? Let’s take a look.
Issue at least one share when forming a company
Choosing how many shares to issue is one of the first decisions you must make when setting up a company. In simple terms, the number of shares you issue when you form a company should be determined by how many shareholders the company has or plans to have.
If you’re going to be the only shareholder, you only need to issue (allot) one share to yourself. If the company is going to have more than one shareholder, you need to issue at least one share to each shareholder.
However, you do have the option to issue more than one share per shareholder, either during or after the company formation process. This decision depends on how much flexibility you need.
For example, perhaps you plan to sell shares at some point in the future, to bring in new business partners or raise capital to grow the business. Or maybe you want to give yourself the option of selling a portion of your shareholdings to your business partners when the company is more established.
By issuing more shares than you require at the present time, you can sell (transfer) some of them when the need arises. A transfer of shares is quicker and simpler than allotting new shares.
Should I issue more than one share?
If you’re forming a company on your own and don’t intend to bring in new shareholders at any point, issuing only one share to yourself is perfectly acceptable. This is common practice in many small companies.
However, if you think that you’re likely to sell shares at a later date, you should issue more when you set up your company. You will own them until the time comes to sell them to a new shareholder.
Issuing shares in quantities of 10 is a popular option, with many companies choosing to issue 100 shares, or even 1000. These quantities are preferred because they are easily divisible, which simplifies the task of allocating or working out a shareholder’s ownership percentage.
Your shares determine your percentage of ownership
The ownership of a limited by shares company is divided into shares. Each share represents a portion (i.e., a percentage) of the company. Therefore, when you own a share, you own a percentage of the company.
- You form a company with one shareholder (you) and issue only one share
- That one share represents the whole company
- You own 100% of the company
- You form a company with one other person and issue 10 shares of equal value
- Each share represents 10% of the company
- You each take 5 shares
- You each own 50% of the company
- You form a company with three other people and issue 100 shares of equal value
- Each share represents 1% of the company
- You each take 25 shares
- You each own 25% of the company
Every share you issue must be assigned a nominal value, which is usually £1. This is the sum that shareholders agree to pay for their shares when they are issued. The nominal value of your shares determines your ‘limited liability’, which is the amount that you’re legally required to contribute if the company cannot pay its debts.
Bear this in mind when choosing how many shares to issue. If you were to issue £10,000 shares, for example, you would liable for up to £10,000 if the company couldn’t pay its creditors. For this reason, it’s best to avoid issuing significantly more shares than you need.