If you choose to operate as a company limited by shares, you’ll have to allocate and issue shares to shareholders. This applies to both private and publicly traded companies. Issuing shares is also a means of raising capital; a share is bought by the shareholder.
A shareholder owns a portion of the company they hold shares in; one share will confer less ownership as the total number of shares increases. There are also different types of shares, each of which has its own rights and obligations.
The number and value of shares in your company also determines:
It should be noted that shares are a residual stake. This means that if the company becomes insolvent, shareholders may not be paid their investment or any gains/losses until the company has paid back all their debts.
So, how many shares are to be issued, which type, and how much capital to raise are important considerations when you form your company.
Each kind of share has its own rights and obligations, but can be grouped with others to form a share ‘class’. These include the following:
This is the most common class of shares. Ordinary shareholders are entitled to vote in company matters based on the number of shares that they hold. In most circumstances shareholders receive one vote per share.
Ordinary shareholders are also entitled to receive dividends which are paid for out of profits. However, ordinary shareholder dividends can only be paid after all preference shareholders (see below) have received their dividends. For further information on making dividend payments, refer to gov.uk
Similarly, when a company is dissolved, the ordinary shareholders are last in line to be repaid their initial investment or any gains/losses after all creditors and preference shareholders.
However, it is possible to create sub-classes of ordinary shares. For example, one option may be to issue ‘class A’ ordinary shares, ‘class B’ ordinary shares, etc. Each of these can have their own unique rights and obligations, so you can vary the dividend paid to different ordinary shareholders or to create non-voting ordinary shareholders.
You might want to create a class of non-voting ordinary shares if, for example, you are looking to raise finance but would like to retain majority control of your company. Shareholders who own these shares can’t vote or attend general meetings, and these are commonly issued as part of incentive schemes to employees.
Preference shares are usually issued with no voting rights. Similar to non-voting ordinary shares, issuing these enables you to raise finance without relinquishing voting control. As a result, they are also used as part of employees’ incentive schemes.
A key feature of preference shares is that they are entitled to a fixed rate dividend. This dividend is paid before any ordinary shareholders receive a dividend, putting preference shareholders first in line to a share of profits. However, since preference share dividends are paid at a fixed rate, this means that they are not entitled to receive a share in excess profits (above their fixed dividend), unlike ordinary shareholders.
Redeemable shares are a type of share that can be bought back by the business at a future date. This date can either be fixed at the time of issuing shares or it can be subject to the discretion of the directors. Preference shares (described in the previous section), for example, can either be redeemable or irredeemable.
You may want to consider issuing redeemable shares as part of the company’s employee incentive scheme. This allows the company to buy back shares issued to employees if and when an employee decides to leave the company.
The initial number and value of shares issued during the formation of a company will be stated in the Memorandum of Association (legal statement signed by all initial shareholders agreeing to form the company). However, this can be altered if, for example, you want to raise funds for new projects. There are a number of ways to raise finance through shares:
Here, shares are offered to existing shareholders based on their current shareholding. Each existing shareholder is given the right to purchase a certain number of shares per share that they already own, usually at a discount. The new shares are often discounted in order to encourage existing shareholders to use their right to purchase.
It is also possible to issue new shares to external investors which can bring in the experience and fresh perspective of new shareholders. On the other hand, the share of the company held by each existing shareholder will fall. However, new investment (with shares selling at competitive prices) can increase the value of a company as a whole, benefiting existing shareholders.
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