One of the defining features of a private limited company is the share structure. Understanding how shares work is an essential part of owning a limited company, but it can be tough to get your head round everything you need to know.
Company shares: the basics
Shares are slices of ownership in a limited company that can be owned by individuals or other corporations.
Every limited company needs to have at least one share at incorporation, even if you are the only person involved in the company and therefore the only shareholder.
The majority of private limited companies have an ‘ordinary’ share structure. This means that the company is divided into a number of equal shares which all carry the same rights, responsibilities, and rewards.
If this is the structure that you adopt, your business will be able to use the Model articles of association from Companies House.
There are other types of shares that your business could use, including shares that don’t allow the owner to vote in company matters, shares that can be bought back after a certain time, and shares that allow some people preferential access to profits.
If you choose to use one of these structures, you will need to draw up Bespoke articles of association when registering the company.
If the company is successful and making a profit, the shareholders will receive a percentage of that profit proportional to the size of their shares. However, in the case of the company being wound up or getting into debt that it can’t repay, the shareholders are liable for the total nominal value of the shares they own, as explained below.
Why issue multiple company shares?
There’s nothing wrong with starting a company with just one share owned by you. You will be able to incorporate the business perfectly fine with Companies House and you will be able to use the profits that the company makes.
Many companies, however, choose to divide the company into multiple shares. 100 is a common number, with each share representing 1% of the company, but you could even make 1000, 10000, or more shares if you want to.
Incorporating the company with multiple shares affords you the scope to bring a partner into the business, or to sell off multiple shares at some point in the future, allowing you to raise capital for the business and bring experienced people in to help with the running of the company.
Shares don’t have to be sold, either. You can have a share structure that allows you to gift them to friends or family members, or you could give some of your employees shares in the business.
The value of company shares
The shares that you sell have both a nominal value and an actual value. The nominal value is the value that the owner of the shares are liable to pay if the company gets wound up or finds itself in financial difficulty.
In the majority of cases, the nominal value of shares is set at £1, which keeps the money that owners are liable to pay to a reasonable amount.
Even at a £1 nominal value, a company with a lot of shares could turn into a financial problem for the owners.
Say you and a business partner start a business with 10000 shares, all with the nominal value of a £1. If the company falls into financial trouble whilst you and your partner are the only shareholders, you will both be liable for £5000.
The actual value of shares is whatever you sell them for. There is no fixed rate for this, as it would normally be calculated based on the money that the prospective shareholder stands to gain from their percentage of the profits. If you sell 5% of a business for £5000, the business will need to make £100000 profit before the investor makes their money back.
Selling shares is one of the primary ways for your business to raise capital, allowing it to get off the ground and continue to grow. If you don’t have shares to sell, you could struggle to find the funding to keep growing.
Documentation of company shares
Throughout your company’s existence, starting with the incorporation with Companies House, the share structure and ownership needs to be carefully documented.
The statement of capital provides an insight into a company’s share structure at the time that it is made, and must be completed on certain occasions, such as incorporation, and when confirmation statements are filed.
Details of a company’s first shareholders are public knowledge, and will have been recorded in the memorandum of association and the company’s initial statement of capital. Share certificates need to be given to any shareholders who buy shares after the incorporation of a company, and stock transfer forms need to be filled out whenever a share is transferred from one person to another.
Changing your shares
Your share structure is not set in stone at your company’s incorporation, but any time that you make changes you need to tell Companies House.
If you issue more shares in your company, you need to tell Companies House within a month, and any other changes must be reported in 21 days.
When you report a change to the share structure, you’ll need to issue a statement of capital (as mentioned above) that should lay out the rights of any share type your company has, how many shares have been issued, and the total nominal value.
Changes to the shares the company issues can be made online, but any other changes have to made by post.
Not yet incorporated? Do your research
If you haven’t incorporated your company yet, it’s worth doing some in-depth research and planning with regards to company shares.
Your share structure can change, but it is helpful to incorporate your business with some idea of what you want that structure to look like - this allows you to have a more comprehensive business plan in place for the future.
published under Tax and Legislation Guides
