When you choose to form a limited company in the UK, you\u2019re given a considerable amount of choice about how you\u2019d like to set up that company. One of which is the types and quantity of shares you want to issue. Most private companies issue ‘Ordinary’ shares, which give equal rights to all members, but some companies can benefit from issuing multiple share classes. Below, we’ll take a look at what this means.<\/p>\n
Ordinary shares are ideal if you\u2019re starting a company by yourself as the sole shareholder and director, if you’re setting up with just one or two other people, or if you just want to keep things simple. However, for companies with more than one shareholder, it may be beneficial to introduce multiple share classes (types).<\/p>\n
There are many types of company shares<\/a>, including Alphabet shares, Preference shares, Non-voting shares, and Redeemable shares, each of which provides different and varied rights to members. To help you understand shareholder rights, as well as the other benefits you may wish to explore by issuing multiple share classes, we\u2019ve compiled this guide that will walk you through the basics.<\/p>\n First and foremost, it\u2019s worth pointing out there are no limits to the number of rights you choose to attach to each share class you\u2019d like to create within your company. There aren\u2019t too many rules that will stifle you. In fact, the only real legal requirements you must comply with are:<\/p>\n Bearing in mind the huge amount of freedom you\u2019ve got to play around with, a question then begs the answer: why issue different rights in the first place? After all, all shareholders are company members (owners), and so why would you want to give different owners different rights as part of their company ownership?<\/p>\n There are a whole lot of situations in which it would make sense to limit or differentiate the rights of various shareholders, but the three most common rights that company owners want to distinguish between share classes are:<\/p>\n There are certainly other key components that could make up the share class rights of your company shares. For example, you could create classes of shares that are redeemable by the company or company member. Likewise, you might want to issue preference shares that would give certain company members priority in the payment of dividends over others. Or pre-emption rights<\/a> on the transfer or allotment of shares from a certain class.<\/p>\n As previously stated, there aren\u2019t too many formal rules about the rights you issue through various share classes. Companies House allows you to determine for yourself how many different share classes you’d like to issue, which members will benefit from the ownership of these shares, and in what ways. You\u2019re also effectively permitted to \u2018rank\u2019 company members and their holdings in terms of priority or importance.<\/p>\n To show you how that might look, we\u2019ll explore a couple of different example scenarios.<\/p>\n First and foremost, let\u2019s delve into how multiple share classes could work for a family-run limited by shares company.<\/p>\n Let\u2019s say \u2018Mr and Mrs Hepworth\u2019 run a successful florist business in their home town. They are concerned for the future financial security of their children, as well as their grandchildren, and so they want to use the company to help their children and grandchildren. A multiple share class company could help them to achieve this.<\/p>\n How? One possible share class structure the Hepworth’s could use would break Ordinary shares into three separate classes. Those classes would be:<\/p>\n In this instance, Mr and Mrs Hepworth would want to take the A Ordinary Shares. While they won\u2019t receive any dividends on their shares, they will retain full control of the company by holding between them the only shares with voting rights attached to them, together in their position as company directors. In addition, if the company were to ever fail and windup, the couple would still be entitled to all surplus assets leftover in the company.<\/p>\n In this example, the couple\u2019s children would be issued B Ordinary Shares. Meanwhile, their grandchildren would be given C Ordinary Shares. The B and C Ordinary shares would benefit from being entitled to dividends, as and when the company declares them.<\/p>\n What\u2019s more, by splitting the children and grandchildren into two separate classes (and allowing for \u201cvarying rates of dividends\u201d), Mr and Mrs Hepworth will then be able to declare different rates of dividends to the two generations, helping them as they see fit.<\/p>\n Had the Hepworth’s not put this structure in place \u2013 simply providing their children and grandchildren with ordinary shares instead \u2013 they would not have been able to set differing dividend rates between the two succeeding generations. Yet, more important still, the couple would have also relinquished some control over their company by allowing others to match them in terms of voting rights.<\/p>\n Next, we\u2019ll take a look at an example of how multiple share classes could work to help a limited company working with outside investors.<\/p>\n Let\u2019s suppose \u2018Annabel\u2019 is setting up a software consultancy firm, and she has decided to raise capital by offering shares in her company to investors. She forms a company with two classes of shares:<\/p>\n The two classes have identical rights to one another, with the exception of the weighting of the voting rights \u2013 and in return for their investment, Annabel provides outside investors with B Shares. She then keeps the A Shares for herself.<\/p>\n Why? By structuring her shares in this way, she will be able to put the outside investors on an equal footing with herself regarding dividend payments and capital distribution on windup. Yet while the outside investors might have insisted on retaining voting rights, Annabel has protected her overall control of the company by increasing the vote weighting her shares hold.<\/p>\n As a result, it becomes more difficult to lose control of the company, even as more outside investors are added.<\/p>\n What are share class rights?<\/h3>\n
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How do multiple share classes work for a family business?<\/h3>\n
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How do multiple share classes work for a company with outside investors?<\/h3>\n
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Corporation Tax Calculator<\/h3>\r\n