All Your Questions About Private Limited Company Shares In The UK Answered

When you’re starting a private limited company in the UK, you will have to assign shares to it as part of the setup.

If it’s the first business you set up, this might be a confusing part of the process. How many shares do you need? Who should have shares in your company? What does a shareholder even do?

Questions like these might fly through your mind. So to help you cut through the confusion, we have put together a list of frequently asked questions about private limited company shares in the UK and answered them for you.

What are limited company shares?

We’ll start with the basics, and look at what company shares are. A share in a company denotes ownership according to the number of shares.

Let’s imagine your company is a pizza. Each slice is a share. Whoever gets a slice will own part of the pizza, and this gives them the right to have a say in what is going to happen with the pizza.

You can cut as many slices as you want, and you can give more than one slice to one person. The more slices of the pizza you have, the more of it you own, and the more of a say you have.

Company shares are also linked to profits, as a shareholder might receive a share of the profits according to the number of shares they own. This is called a dividend payment.

What type of shares can your limited company have?

There are different types of shares that you can give out to shareholders. They differ in the way they denote ownership and the rights the shareholders will have.

Generally, you can decide what kind of shares you create for your own company and what rights and restrictions apply to each share category.

However, there are some that are commonly used by most limited companies, which we will describe in more detail.

When you start your business, it’s highly unlikely that you will need to consider most of these, but as your business grows, you might want to hand out different types of shares to different people.

Ordinary shares

This type of share is probably the one most limited company owners start out with. They are your box-standard shares that give every shareholder full rights.

This means they have a say in how the company is run, a right to dividend payments, and if the company is dissolved, they are entitled to their share of the capital.

So unless you have specific requirements in terms of shareholders, this is the share type you will choose when you set up your limited company.

Preference shares 

If you want to raise capital through shareholders investing in your company but don’t want them to have any say in how the company is run, preference shares are the ones to choose.

Shareholders with this share type have a fixed right to dividends. This means that you have to pay them their share of the profits on a regular basis, normally yearly, but they don’t have voting rights.

These kinds of shares are popular with investors who are looking for a regular return on their investment, so offering them can help you get outside investment.

If you have shareholders with preference shares, you have to pay them their dividends every year if you have made enough profit.

They also take priority over shareholders with ordinary shares. This means if your profits are lower one year, and you can’t afford to pay dividends to all shareholders, you have to pay those with preference shares first.

Even if that means you can’t pay out dividends to ordinary shareholders. In case of liquidation, preference shareholders will also be paid before other shareholders.

Alphabet shares 

You won’t need to consider alphabet shares until your limited company is bigger and has a large number of staff. That’s because they are used to give to employees.

You can create different share types with different rights attached to them, and give them out as a staff perk. This is one way to increase staff retention, because you give employees a stake in the company.

They are called alphabet shares because they will be called A shares, B shares, C shares, etc. Each category will have different rights and is given for different reasons.

One category of shares might entitle their owners to dividends, but they have no voting rights. The shares might be part of their pay package. Another category might have voting rights, but won’t give shareholders a right to dividends.

As a company owner, you might want to reward an employee for outstanding performance, but without raising their salary, as this would increase your employer NIC.

So you could give them alphabet shares that entitle them to yearly dividends to supplement their wages, but without giving them any say in how the company is run. This is basically a wage rise, but without the additional costs to you.

Cumulative shares

Shareholders with this type of share are entitled to dividend payments every year. If in one year the company’s profits aren’t sufficient to pay out dividends, they are classified as arrears.

This means that the unpaid dividends from one year will be carried over to the next dividend period by the shareholder. Any unpaid dividends have to be paid to this type of shareholder as soon as profit margins allow.

Cumulative shares can be ordinary shares or preferred shares. This means that if there are two shareholders, one that has cumulative ordinary shares and one that has cumulative preferred shares, the latter will be paid before the former.

Management shares

This type of share gives a bigger say in how the company is run to the shareholder. This is done by increasing voting rights and influence during meetings.

Basically, it means that their vote counts as two, while the vote of other shareholders only counts as one. Management shares are often given to company owners or founders to ensure they keep control of their business.

However, they can be given to any shareholder you want to have more control and influence in the business. Management shares can also come with the right to dividends.

Non-voting shares

Kind of the opposite of management shares are non-voting shares. These give shareholders the right to dividends, but not to vote at general meetings. So those shares don’t allow the shareholder to have any influence in how the company is run.

It’s the kind of shares that you would give to employees to reward them for their performance.

Redeemable shares

If you don’t want someone, for example, an employer, to have shares in your company indefinitely, you can issue them redeemable shares.

These come with the restriction that the company has the right to buy them back at some point. This could be a fixed date or when a certain circumstance arises. For example, if the employee leaves the company.

This will give you more control over who owns shares in your company.

Redeemable shares can also be non-voting shares or management shares at the same time.

Whatever type of shares you want for your business, they have to be clearly defined in your company’s articles of association. There you have to set out the rights and restrictions of each share type.

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How many shares do you need to set up a company? 

The minimum number of shares you need to set up a limited company in the UK is one, but there is no upward limit.

So if you are planning to be the only shareholder and run your company all by yourself, you can just create one share that is assigned to yourself. You can make changes to the number of shares your company has after you have set it up.

So in case you change your mind and want other people to have a stake in your company, you can make the necessary adjustments. Or if you want to attract investors to raise capital.

For simplicity’s sake, most UK limited companies opt for 100 shares. This makes it very easy to establish ownership, because one share will equate to 1% of the business.

This also makes it very easy to calculate the dividend you owe to each shareholder.

How many shares you give away or sell is up to you. But be aware that the number of shares owned doesn’t just denote ownership, but also control.

If your company has 100 shares and you give away 60, you are left with only 40, which means you have lost overall control of your company. This means that the other shareholders could overrule you on important decisions.

To have full control of your business, you have to own a majority of shares, so at least 51%. At least if all your shares are ordinary shares with voting rights.

Who can have shares in your limited company? 

The simple answer is anyone. There is no law that puts any restrictions on who can own private limited company shares in the UK.

Individuals, companies, families, organisations, etc., can own shares in a UK company. You could even give your child shares in your business if you wanted to.

However, you can put restrictions into your articles of association on who can buy shares in your company. For example, you could stipulate that only individuals 18 years of age or older are eligible.

Or you could exclude companies from obtaining shares in your business, if you so wish.

You can change the articles of association at any point, as long as 75% of shareholders agree.

How do you assign shares in a limited company?

Shares are assigned during the limited company registration process, but before you can do this, you have to make some decisions:

1. How many do you want your company to have?
2. Who will get shares in your company?
3. How many shares will each person get?
4. What type of shares do you want to issue?
5. What is the total value of all shares, called the share capital?

Once you have made all these decisions, you can make it official on the Companies House website.

In the step ‘assigning shares’, you can put in the relevant information. Apart from these, you will also need the names and addresses of all shareholders, what percentage dividend they will get, if they have the right to vote, and if so, how many votes they have.

If all that sounds rather complicated and overwhelming, you could use a company formation agent to register the company on your behalf. You still need to make all these decisions, but at least someone else will put them into the system.

That way, you can make sure that everything is set up as it should be.

If you want to know more, you can read our guide about assining company shares in a limited company.

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What is a share capital?

This term describes the total value of all shares issued, so it’s how much your company is nominally worth. Not to be confused with market value, which is how much it’s actually worth.

Let’s explain this a bit more: when you set up a limited company in the UK, you set the nominal value of the shares you issue. Most companies will set this at £1 for simplicity. If you decide to issue 100 shares with this nominal value, the share capital will be £100.

But of course, once you start trading and grow, the value of your company will increase. This is the market value of your company at which you would sell it.

The share capital also serves the purpose of deciding the amount that is due to be paid to each shareholder if the company is sold.

Even if the market value is much higher, the shareholder only gets back their investment, which is the amount they paid for their shares. The way they get a return for their investment is through dividend payments.

For example, if you bought or were issued two shares in a company at £1 each, you’d get £2 if the company is sold.

If the company is wound up or liquidated, the shareholder is unlikely to get back their investment, as they will be at the back of the line, with other creditors, such as suppliers, being paid first.

What is a share premium?

As we have said, when you first set up a limited company, you have to give a nominal value to the shares you issue, for example, £1 per share.

This is the minimum amount you can sell shares to your company for. However, if your company has grown and increased in market value, you can sell shares for a higher value, according to the market value of your company.

The difference between the nominal value and the higher value is called share premium.

Do I need to create a shareholder’s agreement?

Legally, you aren’t required to have a shareholder’s agreement, but that doesn’t mean it isn’t a good idea to have one.

A shareholder’s agreement is a private contract between shareholders. It sets out the rights and obligations shareholders have and how the company will be run.

Having one means that your company will be prepared to deal with any disputes or incidents that might arise in the future.

This agreement will contain information such as how shares are owned, what types of shares there are, and what rights each type of share has. It will also set out any restrictions on the transfer and issue of shares.

So even though it might not be a legal requirement, it’s well worth drawing one up if you are planning to have several shareholders.

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. 

But you should keep in mind that increasing the number of shares will lower the value of each share.

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 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 listed above 
• Signature of the transferor

If the sale value is above £1,000, a copy of this form must be sent to 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 within 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. 

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What role do shareholders have in a company?

Shareholders own a part of your company. The amount they own is dependent on how many shares 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 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 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 on board and maintain a good relationship with them. 

Now that you know all about private limited company shares in the UK, you can start your new business with confidence.

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