Setting up your business as a Limited Company has a variety of benefits, including less personal risk, better financial backing, and bigger tax breaks with allowable expenses.
If you’re thinking about setting up a Limited Company, one aspect you need to get your head around is shares – which are a great way to earn investment or split the ownership of your business if you’re working alongside others.
To make sure you know everything there is to know about assigning shares in a limited company, we’ve created this complete guide for you to follow along.
Limited company shares explained
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A share, in a nutshell, is a piece of a company. Those who own one own a part of the business, and are thus entitled to some of the profits. It’s like your limited company is a cake, and the slices are shares. You can cut as many slices as you want and divide them as you wish (or keep the entire cake for yourself!). Everyone with a slice will own a piece of your cake.
Before we jump into the rest of the guide, it’s important that we outline a few terms that you’ll come across in this process.
Share capital is the total value of all your shares at the time they are issued. For example, if you issue 100 at £1 each, your total share capital would be £100. Share capital is the total face value of your shares – but might not be what they actually sell for.
Share premium on the other hand, is the value you do sell your shares at. So if you sell them at £1.50 each, this would be the share premium value.
A shareholder is a person that holds shares in your business. How many they hold will equate to how much ownership they have of your company. For example, if they own half the shares, they have half ownership of your limited company.
Shareholders typically have voting rights in shareholder meetings and earn dividends from your profits, but this depends on the type of shares that your company offer (covered below).
A director is a person that manages your business and runs it on a day-to-day basis. You can be a director and a shareholder of a company, which is a common practice for limited companies that are owned and run by one person.
What type of shares can your limited company have?
There are three main types of shares that a limited company can issue:
- Ordinary shares
If you’re setting up a limited company, this will be the option that you are most likely to take.
Ordinary shares are like how they sound. They have no special preferences or caveats attached. Everyone that has a share of your company will have full rights to dividends, voting rights and entitlement to capital should the worst happen.
- Preference shares
Preference shares are ones where shareholders are given a fixed right to dividends and aren’t allowed to vote. This is good for businesses who want to get outside capital, without having any external stakeholders interfere with the day-to-day running of the business.
It also works well for investors who want a steady return from company dividends, without having to devote any time to the business.
- Alphabet shares
Alphabet shares are often used when shares are issued to employees of your limited company. This usually happens within bigger organisations as a staff perk and can be customised to give bigger rewards based on seniority or staff performance. If you’re the sole employee, this won’t be one for you to worry about yet.
Alphabet shares can each have different voting rights, entitlements to dividends, etc. That means companies will sometimes issue B, C, D (and so on) shares to gain more control over the way company rights are managed.
Other share types also exist, including:
- Cumulative preference shares, which means that unpaid dividends from one year can be carried on to the next by the shareholder.
- Non-voting shares, which give the shareholder dividends but take away their right to vote at general meetings.
- Redeemable shares, which are ones that the company will be able to ‘buy back’ at some point in the future, or in the case of an event such as leaving the company.
- Management shares, which carry more voting rights and have a stronger influence during meetings.
For a small limited company, we’d recommend using ordinary shares for now. But if you’re unsure or need further advice, speak to your accountant for full guidance based on your unique situation.
How to assign shares in a limited company
Assigning shares in a limited company happens during the formation process. Generally speaking, you can decide how many shares you want to issue to who and for what amount before your company is formed.
Once you’re ready to go official, you’ll need to inform Companies House of:
- The number of shares that your company has
- Your share capital, which is the total value of your shares
- The names and addresses of all your shareholders
After this stage, any changes that you make will need to be recorded and sent to Companies House.
As well as listing the names and addresses of your shareholders, you also need to list information such as:
- What percentage of dividends they receive from your company profits
- Whether they can vote on company matters
- How many votes they get
When assigning shares in a limited company, it might be a good idea to create a shareholders agreement.
This isn’t a legal requirement but is a great idea for limited companies that are planning to have more than one shareholder.
A shareholders agreement is a binding contract that defines the rights and responsibilities of share members and directors, the way the business should be managed, and the decision-making process within the company.
This type of agreement helps protect both parties and avoid any conflict further down the line, especially if more shares are created.
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How many shares do you need?
There’s no set rule on how many shares a company can have. If you’re planning to be the only director and shareholder, you could issue as little as one to yourself.
On the flip side, there’s no limit to how many you can issue. But you have to be warned that the more shares you issue, the more costly it could be for stakeholders to invest as they’ll have to pay for each individual one.
Generally speaking, a lot of limited companies tend to opt for 100 shares – as it makes the ownership and commitment easy to calculate. How many shares a person has simply equates to their % ownership. Easy, huh?
Who can have shares in your limited company?
Anyone can have shares in your company, as long as you both agree to the purchase. The one thing you can’t do as a private limited company is sell your shares on the stock exchange.
What’s more, as a director you’re not required to have any shares.
You could potentially run the business without owning any part of it, while the ownership is split amongst others. In most cases, small limited companies are majority-owned by the director.
Can you sell your shares?
All allocated shares can be sold or transferred to another person at any point, provided the correct steps are taken. You can also create more as well, if needed.
Shares can be sold or transferred in exchange for:
- A cash payment.
- A non-cash payment of goods, services or knowledge.
In addition, you can also transfer shares as a way to write off debts in some circumstances, as part of an employee share scheme or as a gift to a family member or spouse.
If you want to complete this process, you need to complete a Stock Transfer Form, which will require the following details:
- The name of the company
- Company Registration Number (CRN)
- Quantity and class of shares being transferred (e.g. ordinary shares).
- Name and address of the existing shareholder (known as the transferor)
- Name and address of the new shareholder (known as the transferee)
- Amount paid for the shares or details of non-cash payments lifted above.
- Signature of the transferor
If the sale value is above £1,000, a copy of this form must be sent to the HMRC and the transferee (the person who is receiving/buying the stock) will be eligible for a stamp duty tax of 0.5% of the total sale value.
In addition, any transfers need to be approved by the board of directors at your company. If you’re the only director, this will be an easy approval for you but it becomes more complex the more people you have involved.
Once complete, a copy of the Stock Transfer Form is given to both the transferor (old owner of the stock) and the transferee (new owner of the stock). The transferee is also given a share certificate as proof of ownership.
You’ll also want to keep a record for your company and inform Companies House on your next annual confirmation statement.
However, it’s worth noting that there are some occasions where you need a special resolution to change your company’s shares. This happens if you:
- Issue more shares inside your company
- Cancel any of your shares
- Change the share capital
- Change your shares into other currencies
For any new shares that you issue, you need to inform Companies House within a month of the change. For all other changes, you need to make sure that your shareholders are aware within 21 days.
Do you have to be a limited company to have shares?
Yes, you need to register as a limited company to create shares for your business. It’s one of the benefits that a limited company has over other company structures, such as being a sole trader.
Find out more about limited companies and how to form yours here.
What role do shareholders have in your company?
Shareholders own part of your company. The amount that they own is dependant on how many shares that they own.
Although they own the company, this doesn’t mean that shareholders run your business or manage it on a day-to-day basis. The management will remain with you and any directors that you have appointed.
As a shareholder though, they do care about the success of your company. The more profit you make, the bigger dividends that they’ll earn, or the more they’ll be able to sell their shares for at a later date.
This means that they’ll be interested at the very top level in how your business is performing and may put pressure on directors to go in a certain direction if they feel like it’s best for your company.
Shareholders also get a vote in company decisions (unless you opt for a no-vote share agreement), meaning that big decisions will have to be agreed on by your shareholders. Generally speaking, this will be the big picture thinking and decisions rather than small daily changes.
If you’re planning something big for your limited company, it’s always best to get your shareholders onboard and maintain a good relationship with them.
Ready to form your limited company?
Now you know everything about assigning shares in a limited company, nothing is stopping you from registering your company.
If you don’t want to take care of the red tape and paperwork yourself, then a company formation agent will be the solution for you. These are companies that specialise in forming limited companies and will take care of all the paperwork on your behalf.
Find the company formation agent for you with our reviews of the best company formation agents here.