Assigning Shares in a Limited Company
One of the main decisions you will need to make when setting up a limited company involves the shareholders and the number of shares which you will allocate.
This is perhaps the most important decision for any new company since unlike directors, whose job is to ensure the proper running of the business, shareholders directly benefit from the company’s success or failure.
The level of shareholdings will also affect things such as voting rights and capital investments. It’s therefore important to try and get this right from the start.
In many cases, where there is just one person involved in the company, this will be a very straightforward decision where the owner will be both a director, and will take full ownership of the company by issuing all shares to themselves as a shareholder.
However, in cases where there are multiple people involved, you will need to agree on a shareholding structure that is acceptable to all parties involved. This may be an equal split between all parties that are investing in the business, or it may be more heavily weighted to one or more parties than the others.
Just remember that if party has a majority shareholding, they will have more say in the company when matters are put to a vote and so it’s always a good idea to put together a shareholders agreement, with the help of a lawyer, to protect all parties.
The shareholding structure is usually dictated by the amount of money that party is investing in the company. For example if one party is investing 50% of the starting capital, they would usually be allocated 50% of the available shares in return for their investment.
It’s important to note that in most cases share capital does not have to be paid back. Instead the value of the shares held, will rise or fall based on the company’s success or otherwise. This means if a company fails – the shares may become worthless, or if the company becomes very successful – the shares may become worth many times the original investment.
Shareholders therefore have the most to gain or lose from a business’s performance and so will often put pressure on the directors to ensure the best possible chance of success.
Once you have decided who will receive the shares in a new company, you will need to decide both how many shares to issue and what value to place on each share.
The minimum amount you can issue is 1 single share of at least 0.0001 pence in value with no maximum limit set. However, many companies use a nominal book value of £1 per share although it is prudent to issue shares that equate to the value of the starting capital being invested in to the company.
This means if you have two parties each investing £50 in to a new company. You may decide to issue both parties with 50 £1 shares each. Alternatively you could issue them with just 2 shares of £50 value each.
How you do this is up to you and it will make very little difference to your company. However, if you want to make it easy to show and calculate percentage ownership of a company you may wish to issue 100 shares where each share represents 1 per cent of the company.
Or, If you need to go further, you could issue 1000 shares so the percentage can be calculated to a decimal place – for example being allocated 325 shares out of 1,000 available would give you a 32.5% share of the company.
However, if you have an odd number of shareholders to allocate shares to, you may find issuing a different number works better. The important thing is not so much the number of shares or even their value, but rather making sure the amount issued to each party is mutually agreed and equal to their investment and expected share of the company.
You should also keep in mind that the shares you allocate during the company formation are not set in stone. It’s possible to change shareholdings at a future date either by issuing more shares or transferring shares between members. However, any changes to shareholdings will need to be approved by the existing shareholders and notified to Companies House.