Choosing a company name, registered office and SIC code are the first steps towards incorporating your new business. During the incorporation of your new limited company on companies house, you will also need to issue shares in your new company and specify the number of shares and their nominal value. This essential part of the company incorporation process can be confusing for first time founders and entrepreneurs, especially when there are multiple types of company shares to choose from. This article explains what a limited company is and what company shares are to help you with the new company formation process.
What is a company limited by shares?
A limited company limited by shares is a legal structure which:
- has shares and shareholders
- has separate finances from the shareholders’ personal finances
- is legally separate from the people who run the company
- can keep any profits it makes after paying tax
A company limited by shares must have at least one shareholder and there is no limit on the maximum number of shareholders. A company limited by shares can be public, meaning its shares are listed on a public stock exchange and can transact between investors at any point in time on the stock market, whereas a private limited company is a company which is not public. Public companies need a minimum share capital and a trading certificate.
What are company shares?
Company shares are the basic unit of equity ownership in a business. Shares represent a claim on the company’s assets and company profits. A limited company’s share will have a nominal share value defined at the incorporation and the total value of the shares in the company represents the company’s share capital.
A statement of capital listing the total number of shares, the names of the shareholders and the aggregate nominal value of those shares must be provided during the company registration process. When you start a company, the company can issue as many or little shares as the founding equity. You can therefore consider issuing 1000, 10,000 or 100,000 limited company shares if you are expecting to sell new shares to outside investors at a later date as it will make the cap table management and accounting easier. Equally, you can issue one share to yourself if you are a solo entrepreneur and not planning to raise outside capital.
The share capital is not linked to how much the company is worth and instead to the shareholders’ liability. This means that shareholders will need to pay the nominal value of their shares in full if the company shuts down. When a company issues shares at a market value which is a greater than the nominal value (i.e. at a premium), the premium must be credited to the company’s share premium account.
What are the different types of shares?
There are different types of shares with different rights. The specific rights of a share type are defined in a company’s set of prescribed particulars and memorandum of association:
- ordinary shares: this is the most common type of share and each share will give its owner basic dividend and voting rights.
- non-voting share: these shares are a type of ordinary share which carries no right to vote and no right to attend general meetings. This type of share is usually granted to employees when they exercise their stock options under an employee share option scheme.
- preference shares: these shares rank ahead of other shares for dividends, capital or both but have limited voting rights. A company’s articles of association will define the exact nature of the preference and their rights.
- redeemable shares: these are shares which can be exchanged at the option of the company or the shareholder. Issuing these shares can be a more tax-efficient way of doing share buybacks.
- Deferred shares: these shares have no right to dividends either for a set period of time or until certain conditions are met.
What are the different classes of ordinary shares?
Each company share type can have multiple classes. The Companies Act 2006 provides that shares are of one class if the rights attached to them are in all respects uniform. A company can therefore only create another class of shares if they will have rights which differ from those of existing share classes. A company’s different share classes are also known as alphabet shares (e.g. Class A shares, Class B shares, etc.). The main types of rights which can be attached to shares are
- Entitlement to dividend payments: these are dividend rights which defer from those of ordinary shares and for example be performance related or at a fixed rate.
- Entitlement to vote: certain shares might have more votes than an ordinary share.
- Entitlement to capital on the winding up or disposal of the company: if there are assets left after all debts have been paid off, shareholders of a certain class may have access to these assets before ordinary shareholders.
How to issue company shares?
To issue company shares, directors will need to grant the approval of the new shares and the conditions of the creation of the new shares as per the company’s articles. For example, the new shares could be issues to new investors or alternatively to existing shareholders as part of a share split. Once the company issues the new shares, they will need to update the register of members and inform Companies House of the updates via a confirmation statement.
This article has explained the what company shares are, the different types of share types and classes as well as how to issue company shares. Once you have incorporated your company you will need to open a bank account to collect and make payments, and you will need to create legal contracts with clients, partners and employees in order to grow your activities whilst protecting your business’ intellectual property and liability.
If you provide the wrong SIC code when you set up your company, or your main business activities change after company formation, you can update your SIC code when you file your next confirmation statement. You must file a confirmation statement (previously annual return) at lease once a year but if you need to change your SIC code immediately, you can file a confirmation statement early. Filing a confirmation statement early will start a new 12 month review period. You can file your confirmation statement with Companies House on gov.uk.
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The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.