Limited Company Shares Explained

What are shares?

Starting a new company? Congratulations! 

Shares are one of those terms you may have had a cursory introduction to, until now. Now that you’re starting your own business endeavor, you’re likely to need a deeper understanding of what shares are, and we are here to oblige with this quick-read blog article.

Shares define how the ownership of limited companies is divvied up. Companies can issue as little as a  single share that belongs to the sole Director or owner of the business, with no upper limit to the number of shares that can be issued.

Shares give the company’s shareholders equity stock in the business. To illustrate, if a company has one share that one person owns – that person (the shareholder) owns 100% of the company. If a company issues 2 shares, with each shareholder owning a share, then they both have 50% ownership of the company.

There are two main types of shares that a company can issue:

1. Ordinary Shares: These provide the shareholder with the ability to receive a part of the company profits as dividends as well as the right to vote at shareholder meetings
2. Preference Shares: These shareholders have certain advantages over ordinary shareholders such as priority payouts if the company goes insolvent, and fixed payouts to preferred shareholders (in the form of dividends)

Other types of shares include cumulative preference shares, non-voting shares, redeemable shares, alphabet shares, and management shares.  However, as the name may suggest, ordinary shares are by far the most popular types of shares issued and should be sufficient for most small businesses.

So, when starting a new company, how does a business owner decide how many shares to issue, how much to value each share at (the share value), and what the total share capital – the total value of all the shares – should be?

Well, if you’ll be the sole proprietor and operator of the company, it should be relatively easy to decide how many shares you want to create (for example, you could issue a single share which will give you 100% ownership of the company so you will have full control of the business and be entitled to all its profits).

Suppose you’re planning to register a company with other people. In that case, you will need to think about how the shares will be issued to ensure that everyone will be treated fairly and can maximize their investment in the company.

Some business owners infuse a lot of capital into their businesses upon startup to create the perception that their businesses are larger than they actually are. For example, issuing 1 million shares at £1 each.

However, this can create its own challenges. Firstly, it requires the business owner to have and/or acquire a large amount of capital to invest in the company from the very outset. Secondly, with the business owner being liable for the amount they invest into the company, this can put the business owner in a position of potentially running afoul of the Companies Act 2006.

For more on issuing shares, share value, and share capital, be sure to sign up for future blogs to automatically receive upcoming quick-read blog articles which will answer these, and many other questions that help to provide small business owners with the insights and support they need to start and grow their businesses.

 

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