How many shares should your company have? What types of shares should your company issue? Read on to find out the basic information you will need to know about your company’s shares and shareholders.
This is the final article in our “How to Start a Company” series.
When you register a new company in the UK, you will need to send an application to Companies House. To complete your application, you will need to know the following details about the subscribers (the original shareholders) and the number, class and nominal value (face value) of the shares to be issued.
What is a share? What is a shareholder?
A share is simply a unit of ownership in a company. Each share represents a certain percentage of ownership of the company and that percentage is determined by how many shares are issued. Anyone who owns shares in a company is called a shareholder.
How many shares should my company issue?
There is no fixed number of shares which must be issued on incorporation, although your company will need to issue at least one share when you first set it up. If your company is going to have multiple shareholders, you will need to issue more than one share, as each shareholder must be issued a minimum of one share.
The company can increase its share capital at any time after incorporation, and shares can be split into shares of lower denomination. For example, one £1 share can be split into one hundred 1p shares. The number of shares your company has at incorporation is not critical. The share capital can always be changed at a later date.
A shareholder is usually required to pay the company for their shares at the time that they are allotted (allocated). For example, a shareholder should pay £1 to the company for each £1 share that they are issued. It is, however, possible to issue shares “partly paid”, for example the shareholder pays 25p for each £1 share issued, or even “nil paid”, where no payment is made, but in those circumstances the shareholder will be personally liable to the company for the balance.
Therefore, it is not usually sensible to issue, say, 50,000 shares on incorporation unless you are prepared to put £50,000 of funding into the company by using up share capital either now or in the future. Since there are complex rules restricting the ways in which companies may return capital to their shareholders, it is generally preferable to fund a start-up company by way of loan and then loan in comparatively modest share capital, for example one hundred shares of £1 each.
What types of shares should my company have?
A company will usually be formed with just one type of share, but it can be formed with various types, or “classes”, of shares with different rights attached to them. If your company is registered with one class of share, it is said to have “ordinary” shares.
Your company may, for example, be set up with one hundred ordinary shares of £1 each. Ordinary shares of the same class will have the same voting rights, rights to a dividend (if declared), and rights to participate in a surplus if the company is wound up.
Alternatively, your company could attach different rights to different classes of ordinary shares. For example, some companies set up what are called “alphabet” share schemes, whereby each shareholder who is an employee holds a different class of share (“A” ordinary, “B” ordinary, and so on) and the directors can determine what level of dividend is paid to each class of share depending on the level of performance of the employee shareholder.
Another option would be to have ordinary and “preference” shares. Preference shares are given priority over ordinary shares in respect of the company’s payment of dividends. These are often used to reward a passive investor who wants an adequate return on their investment, but does not want to take an active part in the running of the company. Usually, preference shares do not carry voting rights unless the rights of the preference shareholders are threatened, for example if a preference share dividend has not been paid.
Shares are very flexible instruments. They can be set up with various voting, dividend and capital participation rights which can be tailored to fit your company’s needs. If you feel that a standard share capital with standard ordinary shares may not be right for you, it is best to seek legal advice to explore your alternatives.
If you need assistance with setting up your new business and/or registering a new company, a member of our corporate team would be happy to help. Please do not hesitate to contact our Head of Corporate, Iwan Emanuel, on 01494 893570 or at email@example.com