If you are planning to set up a UK company limited by shares, it’s important to have a basic understanding of shares. What are they? How do they work? How many should or can you have? The concept of limited company shares can be confusing at first, but it’s quite simple once you get your head around it.
If you’re forming a company on your own, it should be relatively easy to decide how many shares you want to create. If you’re planning to register a company with other people, you may need to give a little more thought to ensure that everyone is treated fairly and gets the most out of their investment.
We recommend speaking to an accountant if the ownership structure of your new business venture is complex.
What is a share?
In simple terms, a share is a portion of a company limited by shares. Each share is owned by one or more individuals known as shareholders, or ‘members’.
If you own a share, you own part of the company, and you are entitled to some of the profits. Both the percentage of ownership and profit entitlement is dependent upon how many shares the company is divided into.
Imagine a pie chart or a round cake cut up into slices. Each slice is a ‘share’ of that whole cake. The cake might be divided into equal portions – two pieces, four pieces, eight pieces, etc. Or it may be divided unequally, with some slices being bigger than others. It’s exactly the same when it comes to shares in a company – the cake represent the company, and the slices represent individual shares.
The Companies Act 2006 does not provide a definition of a share, but the most frequently cited legal definition is:
‘A share is the interest of a shareholder in the company measured by a sum of money, for the purposes of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders in accordance with (now sec33(1) of the Companies Act 2006).’ Farwell J. in Borlands Trustee v. Steel [1901] 1 Ch. 279 at p. 288.
Issuing the first shares in a new company
When a limited by shares company is set up (registered/incorporated) at Companies House, the subscribers (i.e., the first shareholders/members) choose how many shares to issue. This information will be included on the company formation application form, with the name of each subscriber also added to the company’s memorandum of association.
The minimum requirement is one share. There isn’t usually an upper limit to the number of shares issued unless the subscribers choose to add a restriction in the articles of association.
When you register a new company, you will choose how many shares to create. The decision will be based on the number of shareholders your company has, as well as any future plans to sell parts of the business to investors.
If you’re setting up a company on your own (as the only shareholder and director), you may wish to issue just one share to yourself. This will represent the whole company (100%), so you will have full control of the business and be entitled to all available profits.
Alternatively, you may want to issue more shares to yourself, or to other people if you are setting up the company with one or more business partners.
Normally, even numbers of shares are preferred, such as two, four, six, eight, ten, 100, etc. This makes it easier to work out each shareholder’s percentage of ownership and, therefore, the percentage of company profits they are entitled to receive.
Examples of equal share divisions:
- Two shares – Each share represents 50% ownership of the company
- Five shares – Each share represents 20% ownership
- Ten shares – Each share represents 10% ownership
- 50 shares – Each share represents 2% ownership
- 100 shares – Each share represents 1% ownership
- 1000 shares – Each share represents 0.1% ownership
Note, if you have multiple share classes with different nominal values, you will need to take into account the nominal value when working out the percentage ownership. For example:
- a company is owned by two people
- one shareholder has one share worth £1.00; the other has one share worth £0.20
- the former shareholder owns 83% of the company, whilst the latter holds 16.67% of the company
When setting up a company, the decision is often based on the amount of capital invested by each member. Usually, the more you invest, the bigger your shareholding will be.
Different types of limited company shares
There are many different types, or ‘classes’, of limited company shares, including:
- Ordinary shares
- Preference shares
- Cumulative preference shares
- Non-voting shares
- Redeemable shares
- Alphabet shares
- Management shares
If your company is small and/or you’re setting up on your own, Ordinary shares should be sufficient for your needs. This is the most popular class, so you probably won’t have to worry too much about all of the different classes we’ve listed. Nevertheless, it’s handy to have a basic understanding of the various share classes available to you.
Ordinary
A standard type of share with no special rights or restrictions attached to it.
Each share provides equal rights to shareholders: the right to cast one vote at general meetings, the right to receive dividends (profits), and the right to a percentage of any remaining capital or assets when the company is wound up.
Members can own multiple shares, which gives them proportionately more rights and control than those with fewer shares.
Preference
Typically, this class carries a right to preferential treatment when dividends are paid out.
The holder of a preference share would receive a fixed dividend sum (rather than a percentage of overall profits) before other shareholders receive their dividends. This is beneficial in situations where the business is facing financial difficulty. However, the shareholder could lose out if business profits increase. Often, preference shares carry no right to vote at general meetings.
Cumulative preference
This type of share holds the right that unpaid dividends from one year can be carried forward to the following years.
This means that the member is guaranteed to receive their profit entitlement at some point, even if the company has no distributable profits in the year in which the dividend should have been paid.
Non-voting
Non-voting shares carry no right to vote at general meetings. Companies will usually issue these shares to employees so that part of their earnings can be paid as dividends. This is a popular tax-efficient strategy often used by larger businesses.
Naturally, companies do not want their employees to be able to vote on important business matters, which is why these shares also carry no voting rights. The main shareholders in a company also issue this type of share to their family members.
Redeemable
As the name suggests, redeemable shares provide a company with the right to buy them back (‘redeem’ them) at some point in the future, either on a fixed date or in response to a particular event. Alternatively, the member in question may also hold the right to redeem the shares.
This type of share is often issued to directors with the proviso that they will be redeemed if and when they leave the company.
Management
Management shares carry additional voting rights, such as 10 votes per share. This class is generally held by subscribers, thus allowing them to retain more power and control than other members.
Rights attached to limited company shares
To keep things simple, we’ll just deal with the rights attached to Ordinary shares. If you are considering issuing different types of limited company shares, we would urge you to consult an experienced accountant before making any decisions because dealing with multiple share classes can be complex.
The rights attached to limited company shares are officially known as the ‘prescribed particulars’. They are set out in a company’s articles of association, and sometimes a private shareholders’ agreement. You must include these prescribed particulars in the Statement of Capital section of the company formation application form.
For a limited by shares company adopting the Model articles of association from Companies House, the prescribed particulars for Ordinary shares are:
Voting rights:
“each share is entitled to one vote in any circumstances”. This means that the shareholder can then cast one vote at general meetings for every share he or she owns.
Dividend rights:
“each share is entitled pari passu to dividend payments or any other distribution”. This reflects the basic right of the shareholder to receive a percentage of company profits in relation to each of his or her shares.
Capital distribution rights:
“each share is entitled pari passu to participate in a distribution arising from a winding up of the company”. The shareholder has the right to a share of any money or assets at the time when the company is wound up.
Value of shares
Each share is specifically given a nominal value. This is usually £1, but it can be set at any amount.
The nominal value does not reflect the true ‘market’ value of the share or the company, i.e., what the share or company is actually worth in monetary terms if sold. It is simply chosen as the limit of liability of the shareholder.
The real value of a share is determined by the value of the company. For example, you could issue 100 shares, each of which has a nominal value of £1. The company’s share capital would only be £100, but the market value of the shares could be £300,000 if it were sold. This would then mean that each share had a true value of £3,000.
Profit entitlement from shares
Most limited company shares carry the right to dividend distributions. A dividend is simply a payment of company profits made to the shareholders. Each shareholder’s profit entitlement is based on the number of shares they own and what percentage of the company their shares represent.
For example, if your company issues 10 ordinary shares, the dividend distribution of each share is 10% of available profits. If you own 5 of those shares, you are also entitled to 50% of the company’s available profits. So, the more shares you own, the more profit you receive.
Paying for your shares
There is no legal obligation for shareholders in private limited companies to pay for their shares, unless the company requests payment or becomes insolvent.
If a company becomes insolvent, it doesn’t have enough money to pay its debts. At this point, members must contribute the nominal value of the shares they hold. This is known as their ‘limited liability’ to the company.
If the company still has debts after all shares have been paid up, there is no further obligation on the shareholders to settles these liabilities. Limited liability companies are responsible for their own debts beyond the nominal value of their issued shares.
However, directors (who are usually also shareholders) can be held liable to further claims and may face prosecution if they are found to have acted illegally or neglectfully, and/or their conduct led to the company’s insolvency.
Issuing and selling shares after company registration
The number of limited company shares you issue during the incorporation process can be changed at a later date if need be, so don’t worry too much if you get it wrong or want to make adjustments. The ownership structure of a limited company is very flexible.
You can create new shares after your company has been registered, you can sell/transfer some or all of your shares to other people, you can buy back shares from other members, and you can reduce the total number of shares your company has too.
There are many options, but we would advise consulting your accountant before issuing or transferring shares to new investors or business partners.
Good evening,
I own 75% of a business with my recently ex partner he owns 25%.
I am looking to buy him out of the business, he has put money into the business initially, so by law, Does he get the full amount back?
He’s been taking a monthly Payment for the last two years so obviously that will be deducted and the accountants are working on a figure at the moment but legally do I or the company have to pay him all the monies he’s put in as a director loan back?
Thank you for your comment, Michelle. Unfortunately, we are unable to provide legal advice and would recommend that you get in touch with a corporate lawyer.
Please accept our apologies for any inconvenience caused.
Kind regards,
The QCF Team
Hi
I own a limited company with another director, 1 share each, due to a dispute the other director is looking to sell their share. If they sell their share to a third party are they also entitled to half the profit thats in the bank account?
similar if the person buying the share, are they entitled to half the business bank account at the point of them taking ownership of the other share? or would a new account be set up from the point they became part of the business?
Thank you for your kind enquiry, Michael.
In most cases, the money in a company’s bank account belongs to the company not the shareholders.
Shareholders can only extract money from a limited company in certain methods, subject to various conditions being met. One way of doing so is to declare dividends. Although practically speaking unlikely (for various reasons), it is hypothetically possible that 50% of the money in the bank account could become the new shareholder’s. This might take place if:
– The money in the bank is solely profit of the company (in other words, is distributable);
– That person has become the 50% owner of the company;
– The company declares a dividend on the full amount that is in the bank; and
– Such a dividend is in line with the company’s articles of association and any other agreements in place.
This is not the only method or consideration you want to think about, and is provided for illustrative purposes only. In many cases, that money won’t be just profit (and therefore may not be distributable).
Finally, for the purposes of clarification, the fact some or all of the shareholders might change does not necessarily mean the company needs to open a new one. Usually, if the account is in the company’s name, it will simply retain this bank account and continue business as usual.
We trust this information is of use to you.
Kind regards,
The QCF Team
The majority shareholder in our business wants to change the articles of association so that he can be a sole director (and not have to have at least one other director as it stands at present). we the other 49% shareholders are worried that there would be disadvantages of having only one director and we may regret it later if we wanted to sell our shares to a 3rd party? Would a sold director Ltd company be less desirable to invest in? Would there be other disadvantages as I imagine it is not s good idea?
Thank you
Thank you for your kind enquiry, Ann.
From a company secretarial perspective, there’s nothing inherently wrong with reducing the minimum number of directors. Private companies limited by shares are only required by law to have a single director appointed. The Model Articles of association, which is the most common form of articles of association adopted by private limited companies in the UK, does not really set any minimum number either. From a commercial perspective, whether removing a clause requiring a minimum number of directors will make the company less desirable is difficult to say, and likely context dependent.
That said, being the director(s) assume a large amount of legal responsibility. When considering lowering the minimum number of directors a company is required to have, it is important to consider if a single person alone can realistically fulfil their legal obligations in addition to running the company on a day to day basis. Perhaps you may want to consider it from this perspective – can a single person adequately fulfil their duties?
Further, it’s not hugely uncommon to require more than one director to be appointed to a company. It’s very common among larger companies to set a higher minimum, but you don’t need to be a massive company to think this necessary. The Charities Commission’s guidance note on setting up a limited company to act as charitable company is a good example of this. When it comes to determining the minimum number of directors for charitable limited companies (which by no means need to be big), the guidance states: “As good operational practice we recommend a minimum of three directors. This will help with the quality of decision making and the sharing of directors’ responsibilities and duties”. Whilst the context may be different for you (you may not be running a charitable company and you may think a minimum of three directors is too high), the validity of this guidance remains.
Finally, it is worth remembering that you are only talking about the minimum number of directors appointed. From a practical perspective, perhaps you might never fall to a single director, even if this change to your company’s articles of association was made.
We trust this information is of use to you.
Kind regards,
The QCF Team
HI
After leaving the family business after decades due to impossible issues My Father is requested my 35% of the shares I own to be given back to the business!!
He posted 400k at companies House this last set of accounts.
Would the shares have a real value !
If he would not purchase these for a fair price . Are there options or third parties to possibly be interested in them
Regards
Thanks for the question.
Shares can be transferred at any amount that is agreed by the transferor (also known as the “seller”) and the transferee (the “buyer”). Unless there are any specific arrangements in place (such as an agreement between the shareholders or special provisions in the company’s articles of association), then normally the amount to be paid buy the buyer is just what the buyer and seller have agreed to exchange the shares for.
This amount might be, for example, the nominal amount of the shares (roughly speaking the “paper value” of the shares), the market value, or even for nothing (“nil consideration”).
In answer to your second question, it may also be possible to sell your shares to a third party or parties, however, you should be mindful that companies will sometimes have pre-emption rights on the transfers of shares entered into their articles, which means the shares must be first offered to the existing shareholders who can choose to take them up, before they can be transferred to a third party. For this, you will need to check the company’s articles of association, and any other agreements that are in place, beforehand.
We hope that helps.
Kind regards,
The QCF Team
Hi can you confirm how I check if I hold shares in a business
Hi Naomi,
Thank you for your kind comment.
If the company is limited by shares and incorporated within the UK, you would be able to find information on Companies House Service, which you can view here: https://beta.companieshouse.gov.uk/
Firstly, it should be pointed out that it is possible that the shareholding distribution within a private limited by shares company in the UK may not be apparent from what is listed on Companies House public register.
If you are a director or shareholder of the company, you can request to inspect the Register of Members from another director or the Company Secretary (if one is listed on Companies House), which is a list of all current shareholders and shareholdings of the company in question.
Alternatively, the Incorporation document (IN01) listed on Companies House on the date the company was incorporated will show the shareholdings at the time of incorporation.
If a share transfer or an allotment of shares takes place, please note that an updated list of shareholders will appear on the subsequent Confirmation Statement; however, this means that in the intervening period between the transfer or allotment and the filing of the Confirmation Statement, the shareholders listed on Companies House will be out of date. Therefore, we recommend you take great care when attempting to deduce the shareholders of a company via Companies House public register.
I trust the above information is of use to you.
Kind regards,
Tana
you should search for the company name, click on the relevant company entry, and then select ‘Filing History’. Once on the company’s Filing History,
HI, I own one of two shares in a Manx limited company with my sister who owns the other share. She is a Manx resident, I am a UK resident. The company owns two buildings in the uk which generate income , the profit of which gets distributed as dividends. The nominal value of the shares are £1 each. Can I sell my sister my share for £1 without liability for anything relating to the value of the assets which that share represents (ie the market value of the company’s assets)? Do I in any way as a shareholder own the assets of the company ? Thanks for your advice. Robert.
Hi Robert
Thank you for your comment.
Unfortunately we are not in a position to provide advice on taxation with regards specific cases and I would recommend you contact an accountant or tax expert. If you would like me to refer you to our accountancy partners, Haines Watts, please email me at [email protected].
In general terms, the shares of a mature company that is generating income will have a premium value, and it is this value which is generally paid on transfer on the shares to the transferee. Having said that, the shares can be sold at the nominal value; however, there is usually a tax liability.
Kind regards,
Graeme