Introduction to shares
Companies limited by shares are often divided into portions of ownership. Each portion is called a ‘share’. A company with only one share has not been divided into different parts - that one share represents 100% of the business, and the shareholder who owns that share owns all of the business. However, if a company has more than one share, ownership of the business has been divided into equal portions, with each portion representing a percentage of the business. One or more shareholders will buy these shares, thus owning some or all of the company.
What is the purpose of shares?
When you set up a limited company or limited liability partnership, you will be required by law to keep (where applicable) the following statutory records and make them available for public inspection at your registered office or SAIL address:
- Shares dictate the amount of control held by each shareholder - the more shares you have, the more control you have.
- Shares represent the decision-making power of each shareholder - most shares carry the right to cast one vote on important decisions that need to be made. Therefore, the more shares you have, the more votes you may cast at general meetings.
- Shares determine the percentage of business profits a shareholder is entitled to receive.
- If a shareholder owns all issued shares, he or she may receive 100% of all surplus income (after tax, bills, etc.) generated by the business each year. Alternatively, this money can be re-invested in the business.
- If a company has more than one shareholder and share, then each shareholder will be entitled to receive a percentage of the profits in relation to the percentage of ownership represented by the number of shares.
- Shares dictate the limited liability of each shareholder.
- If one shareholder owns all issued shares (one or more), he or she is legally required to contribute the nominal value of each share (normally £1) to cover debts if the business is unable to pay its bills.
- If a company issues lots of shares to lots of different shareholders, each shareholder has to contribute the nominal value of each of their shares.
- Companies limited by guarantee do not have shares. Ownership is determined by the amount of time and money each guarantor contributes to the company, and the amount of money they guarantee to pay if the company becomes insolvent or is wound up. This is all agreed between guarantors.
What is share capital?
Share capital is the collective nominal value of all shares issued by a limited company. It determines the value of a company and the total limited liability of the company’s shareholders. For example:
- If a company issues only 1 share with a nominal value of £1, the share capital of the company is £1.
- If a company issues two shares with a nominal value of £1 each, the share capital of the company is £2.
- If a company issued 100 shares with a nominal value of £1 each, the share capital of the company is £100.
There is no limit to the number and value of shares a company can issue, unless the articles of association includes an optional provision of authorised share capital.
What is authorised share capital?
Authorised share capital is a restriction that can be included in the articles of association to limit a company’s total issued share capital to a fixed sum. This was a mandatory provision under the Companies Act 1985, but it was abolished under the Companies Act 2006 when the payment of Stamp Duty on issued share capital became redundant.
Private companies limited by shares must now add this provision to their articles if they wish to restrict the number and value of shares that can be issued during and after company formation.
Any company that was registered prior to the abolition date - 1st October 2009 - will be subject to the restriction unless the shareholders pass a resolution to remove the provision or increase the authorised sum. Alternatively, it may be easier to simply adopt the latest Model articles in their entirety if a company wishes to completely remove the provision of authorised share capital.
Different types of shares
Limited company shares come in a variety of classes, or ‘types’. Most companies, however, only issue ‘ordinary’ shares. This class of share normally has a nominal value of £1 and provides equal rights to each shareholder. These rights typically include (per share): the right to cast one vote at general meetings; the right to equal dividend payments; and the right to equal capital if the company is wound up/dissolved.
There are lots of other classes of shares that companies may issue, including:
ABC or Alphabet shares
Ordinary shares divided into different categories. Each category provides different voting rights, different rates of dividend payments and various other rights to each class of shareholder. It is simply a way to vary the different rights of ordinary shares to different shareholders.
Deferred ordinary shares
A type of share that usually only pays dividends to shareholders when minimum dividends have been paid on all other share classes. Deferred shares typically offer the right to vote at general meetings, and the right to receive a share of surplus capital upon the winding up of the company.
Provides additional voting rights to shareholders. Most commonly issued to the founding members of a company to enable them to maintain more control than other shareholders who join the company after incorporation. Management shares usually carry multiple votes - whereas other share classes typically carry just one vote per share.
This class of share can be issued without voting rights, thus providing the right to receive dividend payments from company profits but no right to cast a vote at general meetings. Companies will often issue this type of share to employees or family members of the main shareholders.
Provides shareholders with a preferential right to a fixed percentage dividend payment; i.e. their profit entitlement is prioritised ahead of shareholders of other share classes. This type of share is typically non-voting; therefore, the shareholders have no right to cast votes at general meetings. Preference shares are sometimes redeemable, too.
A type of share that is issued on the condition that the company can buy back the shares at a future date, either at a fixed date or on a conditional basis. This type of share is often issued to employees, thus allowing a company to redeem the issued shares if and when an employee leaves.
Share classes are not restricted to these shares alone. A company may create any type of share it wishes. The aforementioned types of shares are simply the most common and popular classes used by private limited companies in the UK.
Prescribed particulars of rights attached to shares
All share classes must have prescribed particulars. These are simply the various rights attached to each class of share - voting rights, dividend rights, capital rights, and redeemable rights - all of which must be outlined in the statement of capital during the incorporation process.
Prescribed particulars may also be outlined in a company’s articles of association. They are defined in the Companies (Shares and Share Capital) Order 2009 as:
- Particulars of any voting rights attached to the shares, including rights that arise only in certain circumstances;
- Particulars of any rights attached to the share, as respects dividends, to participate in a distribution (of profits);
- Particulars of any rights attached to the shares, as respects capital, to participate in a distribution (including on winding up; and,
- Whether the shares are to be redeemed, or are liable to be redeemed, at the option of the company or the shareholder.
When completing the prescribed particulars section of the statement of capital, Companies House suggests following these rules:
- Show details of the prescribed particulars for every issued class of share.
- Provide information that is meaningful. Do not simply refer the reader to another document or the legislation for the share rights information.
- Show details of voting, dividend and distribution rights on winding up, but there is no need to refer to capital distribution or redemption if they do not apply.
Example of acceptable wording:
“Ordinary shares have full rights in the company with respect to voting, dividends and distributions.”
Examples of unacceptable wording:
- "please see/refer to the articles of association for the rights"
- "rights as set out in the articles"
- "as in the Companies Act 2006"
- "not applicable"
- "pari passu"
What is the nominal value of a share?
Shares represent the limited liability of a company and its shareholders; therefore, all shares must have a nominal value that is paid up at the time of their issue, or at a later date upon the request of the company if the business is unable to settle its liabilities.
The nominal value (par value) of a share is the absolute minimum sum that a share may be sold/purchased for. This means that a company cannot simply sell its shares for less than their nominal value or give them away for free, unless the nominal value of the shares is ‘paid up’ by the company beforehand. Only then may the company issue free shares to family members of existing shareholders, for example, or to employees as part of an incentive scheme.
The nominal value is not the same as the actual value (market value) of a share which, in many cases, may be much higher - the difference between the nominal value of a share and the price paid for a share is known as the ‘premium’.
Most companies issue shares with a nominal value of £1, but you may issue shares with any nominal value from 0.01p.
How many shares to issue
You can issue any number of shares when you are setting up a company, provided you issue at least one. For small companies registered with just one shareholder, it is common to issue just one share. However, you must consider your future plans. For example, if you wish to sell shares to other investors at some point in the future, perhaps to raise capital to expand your business, you should consider issuing more than one share during the company registration process. This will make it easier to sell shares as and when required.
An even number of shares is an ideal choice for many companies - quantities such as two, 10, and 100, for example. This makes it easy to work out what percentage of the company is owned by each shareholder.
If you issue a greater number of shares, you can sell smaller portions of your business to lots of shareholders and keep most of the shares for yourself, thus retaining majority control of the business. If you issue just two shares, for example, each of which represents 50% of the company, you will be selling half of your business to someone else.
Ideally, you should issue one, 10 or 100 shares. If you issue 10 or 100, you should keep at least 6 or 51 shares for yourself, respectively. This will enable you to retain majority ownership and control.
Be wary of issuing too many shares, as this will increase the limited liability of the shareholders if the company runs into financial difficulty or is wound up.
Issuing and transferring (selling) shares after company formation
Issuing more shares
Regardless of the number of shares you issue during the incorporation process, you may issue more shares at a later date, if need be. This procedure requires increasing your company’s share capital and creating new shares in addition to the ones you have already issued. This will only be necessary if you wish to sell more shares than your company has issued.
You must refer to the articles of association before issuing more shares. If the articles contain any restrictions; like authorised share capital, pre-emption rights or the directors’ power to allot (issue) shares, you will have to take these into consideration before taking any action.
- Authorised share capital - As previously discussed, if you include authorised share capital in your company’s articles, you will not be allowed to issue more shares than the total authorised share sum, unless the shareholders pass a special resolution to remove or increase the restriction.
- Pre-emption rights - This is another optional provision that can be included in the articles. The sole purpose of this provision is to protect the rights of existing shareholders. If new shares are created, existing shares are diluted in overall value in relation to the percentage of the business they represent; therefore, pre-emption rights give existing shareholders the right to purchase any available shares before outside investors. If pre-emption rights are included in the articles, new shares must be offered to existing shareholders relative to the percentage of their current shareholdings.
- Directors’ powers - Model articles permit directors to authorise the allotment of new shares; however, it is possible for shareholders to amend the articles to restrict directors’ powers. In such circumstances, any new share issue will require approval from the shareholders.
To issue more shares, a Return of Allotment of Shares (Form SH01) must be delivered to Companies House within 15 days of the allotment. To complete this form, you must provide the following information:
- Company name and registration number
- Allotment date
- Details of new shares
- Updated statement of capital
- Prescribed particulars
- Signature of a director
This form can be downloaded and delivered to Companies House online using our free Client Admin Portal. Shareholders’ details should be updated on the statutory register of members and delivered to Companies House on the next confirmation statement.
If you wish to sell shares to raise capital, but do not require creating more shares, you can simply transfer some of your company’s existing shares to other shareholders or outside investors. However, you must still refer to the articles for restrictions such as pre-emption rights or the director’s power to authorise the transfer of shares.
This process is much easier than allotting new shares. Simply complete a Stock Transfer Form (J30 Form) with the following information:
- Company name and registration number
- Details of transferred shares
- Amount paid (or due to be paid) on transferred shares
- Non-cash payment details - if shares are transferred as a gift, for example, or as part of an employee share scheme
- Name and address of current shareholder
- Name and address of new shareholder
- Declaration of Stamp Duty (if applicable)
Stamp Duty is only payable to HMRC if the sale of shares exceeds £1,000. In such instances, the Stock Transfer form must be stamped by HMRC, and the new shareholder will be required to pay 0.5% of the sale value to HMRC.
There is no need to send the Stock Transfer form to Companies House, but you will require updating shareholders’ details on the next confirmation statement.
Administrative requirements upon the allotment or transfer of shares
- New shareholders must receive a share certificate.
- The company must keep copies of all share certificates.
- Upon the transfer of shares, both the old and new shareholder should receive a copy of the Stock Transfer form.
- The company must keep a copy of all Stock Transfer forms with its statutory records.
- The company must keep a copy of all Returns of Allotment of Shares with its statutory records.
- Any cash payments for shares must be paid into the company’s bank account.
- Shareholders’ details should be updated in the company’s statutory register of members.
- Companies House will update shareholders’ details on the public register when the next confirmation statement is filed. You can either wait until the confirmation statement deadline, or you can file a confirmation statement immediately, if you would like the information updated immediately.
A share certificate is a document that verifies the ownership of shares. Each certificate should contain the following information:
- Company name and registration number
- Share certificate number
- Date of share issue or transfer
- Name and address of shareholder
- Number, class and nominal value of shares
- Directors’ signature
- Registered office address of company
Every shareholder should receive a share certificate when new shares are purchased. The company must keep copies of all issued certificates.
Paying for company shares
Shareholders usually pay for their shares immediately, because shares are normally sold as a means of raising capital. However, if a company permits, shares may remain unpaid until a request is made by the company. A call to pay for shares usually occurs if a company becomes insolvent (unable to pay its bills) or is wound up (dissolved).
Most shares are paid for in cash, but there are other forms of payment that companies may accept (at their discretion), including:
- Shares in other companies
- Writing off debt
- Gift or bonus (no payment required)
- Goodwill gesture
- Employee incentive or remuneration
Cash payments must be paid into a company’s business bank account and recorded in the financial accounts. The public register will state whether a company’s shares are paid or unpaid at the time of its most recent confirmation statement. For information about the statement of capital and confirmation statement, please refer to our Reporting Requirements section.