Issuing shares is usually a very straightforward process for small companies, especially when a company is set up with just one shareholder, or a few shareholders who have equal ownership.
However, if you have decided to set up a private company limited by shares, you will need to make a number of important decisions and ask yourself a few questions relating to issuing shares:
- How many shares should I issue?
- What type of company share is best?
- How much should each share cost?
Most businesses are set up with a view to making a profit for the benefit of their owners. This is why the majority of limited companies are ‘limited by shares’, which means they are owned by one or more people, known as ‘shareholders’. Each shareholder owns at least one share and is entitled to a portion of any profits made by the business.
How many company shares should I issue?
The number of shares you issue during the company formation process will depend on how many shareholders your company has, and whether you plan to bring in new investors in the future.
Before issuing shares, it’s also important to be aware of liability. A company’s share capital, which is determined by the total number and value of issued shares, represents the limited liability of its shareholders.
Therefore, the more shares you issue, the higher the financial liability of shareholders in the event of insolvency. With this in mind, it’s best to avoid issuing a large volume of shares when you do not have to.
Setting up a company on your own
If you’re setting up a limited company on your own, you will be the sole shareholder and director. In this type of situation, it is commonplace to issue just one ‘Ordinary’ share to yourself. This one share will represent 100% of the company, which means that you will have full ownership rights and be entitled to receive all of the profits.
If you are planning to bring in new shareholders at some point in the future, you may wish to issue more than one share during the company formation process. You will own all of these shares initially and then sell some of them when need be. Alternatively, you can wait until after company formation to issue new shares.
Setting up a company with other people
If you are forming a company with other people, you will need to issue at least one share per shareholder. It may be the case that one person holds more shares than others, depending on the amount of initial investment, as well as voting rights, profit entitlement, and their overall involvement in the business.
What type of company share is best?
Most private limited companies only issue Ordinary shares. This class (type) of share provides one vote per share, with each share carrying equal rights to dividends (profits). If you set up a company with ‘Model’ articles of association, you can only issue Ordinary shares.
Many other classes of shares are available, each of which confers different rights to shareholders. You may need or wish to issue different classes of shares if you plan to raise equity finance from outside investors, prioritise dividend payments to certain shareholders, vary voting powers of particular shareholders, protect against hostile takeovers, or offer shares to employees.
To find out more about issuing different types of companies shares, read our comprehensive post on Understanding Limited Company Shares.
How much should each company share cost?
When issuing shares, a nominal value must be attached to each share. It is usually £1. This nominal value is the minimum price that the shareholder agrees to pay for the share. It also represents the extent of the shareholder’s liability per share toward the debts of the company.
Normally, shareholders have to pay for their shares as soon as they are issued. However, depending on a company’s articles of association, it is sometimes possible to pay for shares at a later date.
If you decide to sell your shares or issue more shares after incorporation, you will need to work out the market value of these shares. The market value will likely be higher than the nominal value, because it will be based on the company’s worth. In such instances, it is advisable to seek professional advice to ensure an accurate valuation of your company and shares.