Issuing shares as a limited company

Issuing shares is one of the more interesting and prestigious parts of running a limited company.

It is only an option with this particular business structure – things work differently for publicly listed companies.

After you’ve spent time building an incredible business with either rapid or steady growth, it’s natural that you might want to bring people on board whose financial backing will be able to further support and bolster the business. 

This additional support should increase your feelings of responsibility and accountability to others, creating a bigger drive to make it a success, so that everyone who supported the business to that point is able to benefit. It’s a little like handing out slices of cake at your birthday party – but with a lot fewer candles and a lot more regulations.

In this guide, we’ll explain all you need to know about issued shares for limited companies.

What are issued shares?

Issued shares are the total amount of shares available, i.e. shares that are available to be sold and traded to potential investors, and any currently stored in a company’s treasury.

There are also unissued shares. These are not for sale and will likely never be circulated within the public market. These are usually irrelevant to investors, don’t tend to affect the share capital, and are rarely ever used except in the case of extreme emergencies.

Why companies issue shares

Companies issue shares (by selling them or giving them away) that represent an official ‘percentage’ of the business. They can be issued to founders, staff, or anyone interested in becoming a shareholder for the public record.

While a company or company owner can create as many shares as they want, nothing is seen as valuable if it can be endlessly replicated and diluted. So, it is up to each company to decide where they draw the line, and what they consider reasonable, on their own terms. 

Companies and company owners will often limit shares to create a sense of exclusivity and retain the perception of a high value for each share. 

Private limited company shares

A private limited company (also known as a ‘limited company’, ‘limited liability company’, PLC, LLC, or ‘company’) is a type of business structure where the company has a legal identity of its own, separate from its owners. 

Within a limited company, you get to issue and sell shares (unlike sole traders, for example), and shareholders can help the business grow. They do not trade on public exchanges, however, as that would have to be done through an Initial Public Offering (IPO) when the company reaches a specific amount of profit. 

Advantages and disadvantages of issuing shares

Advantages

• Investment without debt – You are selling or giving away a percentage of your company. It may be a sale, or a benefit for staff, founders or investors. Issuing shares can be one way to gain capital for your company, particularly as part of a series funding rounds.

• Diversification of ownership – By issuing shares, a company can diversify its ownership base and spread the risk among a larger number of investors. This can help to reduce the risk of a single investor or group of investors gaining too much control over the company and potentially using that control to the disadvantage of other shareholders. Additionally, having a wider range of shareholders can provide the company with access to a broader pool of expertise and resources, which can be valuable for the company’s growth and development.

Disadvantages

• Dividends – You have to distribute future profits to your shareholders on a periodic basis for as long as they hold the shares. This is not so much of a disadvantage if the business is going well, but can feel less palatable in harder times.

• Pressure / Accountability – When you own the company alone, you don’t have to answer to anyone or justify your actions, but when you have large shareholders, it is more than likely that you will have to at times.

• Ownership – Issuing shares means you lose a percentage of ownership in your company, and this is always something that you have to watch out for. As you may have spotted, we’ve covered this on both the advantages and disadvantages list. Whether you see this factor as a pro or a con all depends on what your company goals are, what your founding vision may have been, and how much ownership you intend to give away.

When might you have to issue shares?

Hopefully, issuing shares is something your business is choosing to do, at a time of its preference. But, sometimes companies are compelled to issue shares as a last resort in the case of high debt, so they can recoup some capital gains and start over with a cleaner slate. 

In this case, issuing shares is a quick and efficient way to raise capital, particularly if there is a remaining level of interest or demand, despite your trickier circumstances. 

When the hard times pass, and if you as the founder would like to regain control and power over your company and your shares, there is always a possibility that you can make offers to your shareholders to potentially buy the shares back.

How to Issue Shares: Step by Step

Here is our step-by-step guide to how you issue shares in your company:

Step 1: Determine the type of shares to issue

There are a couple of different types of shares that can be issued, including founder shares which are typically issued right at the beginning of a company’s formation.

Founder shares

These are shares that are owned by the founders of a company. They are usually given at face value, and usually at large percentages. A founder can issue up to 100% of the shares for themselves, but this would of course defeat the purpose of using shares to generate more money for the company. In most cases, founder shares come with certain rights and privileges that are not available to other shareholders. 

Ordinary shares

Most companies have just ordinary shares. They carry one vote per share, are entitled to participate equally in dividends and, if the company is wound up, share equally in the proceeds of the company’s assets after all the debts have been paid.

Preference shares

This is a share type that ranks ahead of ordinary shares, typically with a higher claim to assets if the company were to be wound up, and a ‘fixed’ share income that does not participate in the fluctuations of the company (which is therefore considered less risky overall).

Alphabet shares

Alphabet shares are a term that describes different classes of shares denoted by a letter. The classification determines a group of shares’ rights, which can be determined and personalised by the company according to their personal needs. This is usually done to make the shares more accessible for people in different tax brackets or who would like different benefits and features. For example, they could classify an ‘A’ share as one that costs £50,000 with a high dividend rate, and a ‘B’ share at a lower upfront cost of £10,000 but also a lower dividend rate.

Step 2: Set the number of shares to issue and their par value

Par value is the nominal or face value of a share in a company.

If you’re issuing shares to investors, then the number of shares to issue should primarily be based on the company’s capital needs. For example, if the company requires a significant amount of capital to fund its operations, it should be looking to issue a larger number of shares.

If the company already has a strong financial position, it may be appropriate to set a higher par value for its shares. However, if the company is just starting out, or is in a weaker financial position, a lower par value may be more appropriate.

The number of shares issued should also be based on the demand from potential investors. If there is strong demand for the company’s shares, the company may want to consider issuing a larger number of shares to take advantage of this demand.

Step 3: Determine the method of issuing shares

There are different methods of issuing shares that a UK company can use to raise capital, depending on their main objectives and goals. Here are some of the most common methods:

• Rights issue: A rights issue is a way for a company to raise capital by offering existing shareholders and investors the right to buy new shares in proportion to their existing shareholding. This allows the company to raise capital without diluting the ownership of existing shareholders.
• Initial public offering (IPO): An IPO is the process of issuing shares to the public for the first time. This allows the company to raise capital from a wide range of investors and can help to increase the visibility and profile of the company.
• Private placement: A private placement is a way for a company to issue shares to a specific group of investors, such as institutional investors or high net-worth individuals. This can be a more efficient way to raise capital than a public offering, as it can be completed more quickly and with fewer regulatory requirements.
• Bonus issue: A bonus issue means issuing additional shares to existing shareholders, free of charge. This can be a way to reward existing shareholders and increase the liquidity of the company’s shares.
• Convertible bonds: Convertible bonds are debt securities that can be converted into shares at a later date. This can be a way for a company to raise capital without immediately diluting the ownership of existing shareholders.

Step 4: Prepare the necessary legal documents

In the event that new shareholders are to be included in your company, and new shares are to be issued, you will have to update a document called The Resolution To Issue Shares. 

This is passed by the founder, board of directors, or shareholders, to authorise the issuance of shares. It’s also important to bear in mind that when issuing new shares, existing shareholders must give consent.

Step 5: Determine the price at which the shares will be sold

At this point, you determine the price at which the shares will be sold, offer the shares to potential investors or shareholders at that price point, receive payment for the shares (unless you are gifting them to staff or founders), and then issue share certificates or electronic records to the new shareholders.

Step 6: File and/or update the necessary paperwork with regulatory bodies

It is important that you fulfil all the other necessary legal paperwork, including:

• The Shareholder Register – A list of active owners of a company’s shares, updated continuously.
• Form SH01 – This form is used to notify Companies House of the allotment of new shares, including the number of shares issued and the names and addresses of the new shareholders.
• The Register of Allotments (aka ‘Statement of Allotments’) -The number of shareholders and their shares must also be stated, and stay updated with Companies House. This register/statement must include details of the new shares issued, such as the number, type, and price of the shares.
• Statement of Capital – This is a document that summarises the company’s share capital, including the number of shares in issue, their par value, and any changes to the share capital. 

Step 7: Issue evidence of ownership to new shareholders

Share Certificates are physical certificates that may be issued to shareholders as evidence of their ownership of shares in the company.

Step 8: Consider any tax implications associated with the issuance of shares

If a company issues shares and pays dividends to shareholders, the dividends are generally subject to income tax. The company may also have to withhold income tax on the dividends before paying them to the shareholders.

Capital gains tax can also be a factor if the company issues shares and subsequently sells some of its own shares for a profit, as it may be liable to pay CGT on the gain, especially given the increase in CGT rates following the government’s Autumn budget announcement.

These higher rates mean that employees who previously benefitted from share schemes (e.g. employee stock options or employee share ownership plans) may now face a higher tax burden when they sell their shares, which can make schemes less financially attractive. 

Moreover, share schemes are often used to align employees’ interests with a company’s long-term performance, offering them a stake in its success. However, if employees feel like these changes are making it less rewarding to sell their shares, it could impact the appeal of the scheme – ultimately affecting motivation and engagement with the company’s long-term growth.

How should businesses navigate CGT increases?

First, businesses should be transparent with employees about the changes in CGT rates and how these might affect the value of their share-based incentives. Understanding these new implications will help staff make more informed decisions about when to sell their shares.

Moreover, businesses may want to review and potentially adjust their share schemes to offer greater tax efficiency. For example, businesses could consider schemes such as the Enterprise Management Incentive (EMI), which is designed to help small businesses attract the best talent by offering statutory tax relief for employees on their financial gains. Another alternative is Share Incentive Plans (SIPs), which allow companies to offer employees tax-advantaged shares.

Given that CGT rates apply to gains realised when shares are sold, businesses could also advise employees to hold onto their shares longer to potentially benefit from future tax reliefs or other strategic financial planning, especially if the company expects significant long-term growth. However, it’s important to note that some companies may not be permitted to offer financial advice to their employees, so may have to tell their staff to consult with an accountant or personal finance adviser instead.

However, not all tax implications are negative. For example, a company may be able to claim corporation tax relief on the costs associated with issuing shares, such as legal fees or underwriting fees.

In some cases, a business might also issue shares that qualify for tax incentives through government-backed programs that encourage investment in early-stage businesses, such as the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).

Step 9: Comply with any ongoing reporting and disclosure requirements with regulatory bodies

It’s a good rule of thumb for most business activities in general that you want to keep all the main governmental and regulatory bodies notified of any changes in your company structure as soon as possible. 

For most of the things mentioned within this process of issuing shares, these changes should all be filed within 14 days.

Things to bear in mind when issuing shares

When issuing shares, there are several important things to bear in mind. Here are some key considerations:

Dilution of voting power and/or profits

It’s important to note that shareholders who hold your typical ordinary shares will also have a percentage of the company’s voting rights. 

This is very important when considering how much percentage to give a shareholder because it gives them significant influence in the company. You’re unlikely to want any one individual investor to have more shares than you as a company founder, because, in a worst-case scenario, it would mean that a shareholder could potentially use their majority to vote you out of the company.

In order to prevent unfairness or dilution, the most common way to issue more shares whenever a new shareholder purchases shares is to use percentages. 

As an example, no matter how many new shares there are in total, the people who purchased 40% will always have 40%, by virtue of they, too, receiving more shares. This could help to avoid disputes and disagreements in the future.

Issuing shares can dilute the value of existing shares and reduce the proportion of profits each shareholder is entitled to in some cases. This can affect the company’s taxable profits and may result in a lower corporation tax liability.

Stamp duty

If the shares were paid for, or partly paid for, by transferring assets to the company (i.e: they are paid for other than in cash), you will also need to consider if any stamp duty may be payable on the transfer of the assets.

Costs of issuing shares

Issuing shares can involve significant legal and administrative costs, particularly as you’ll want to avoid human errors when filing all the necessary documents. Companies should carefully consider the costs and benefits of issuing new shares.

Rules & Regulations for Issuing Shares

In the UK, the processof issuing shares involves complying with the Companies Act 2006. In short, this sets out the legal framework for the formation, governance, and operation of companies in the UK. That includes the requirements for company registration, the duties of directors and company officers, and rules for shareholder meetings and decision-making. 

Read more

• Wills for business owners: passing it on

Conclusion

Issuing shares can be a useful tool for companies to raise capital, or an appealing way of rewarding staff and founders with a stake in the company’s success. While there are some key considerations you will have to make sure to get right, ultimately we believe learning how to issue shares is an important step for any limited company on its growth journey.