Issuing shares when setting up a limited company
Looking for some clarity when it comes to issuing shares? Or perhaps capital has got you in a tangle... Read on for some clarity on how to issue shares when setting up your own limited company
If you've come up with a killer business idea, you'll be itching to get your start-up off the ground as quickly as possible. Thinking about which legal structure to choose won't be what gets you out of bed in the morning, but it's important to take some time to think this through.
Decisions you make now can have a big impact on the future, especially where co-founders are concerned. The structure of your business can affect your ability to raise finance, as well as determining legal ownership, entitlement to dividends payments, and liability should the business fail.
But before we tuck into the ins-and-outs of issuing shares, let's answer the questions:
What is share capital?
In a nutshell, share capital is the total value of shares.
For example, if you have decided to issue one hundred ordinary shares at a nominal value of £1 each, then the aggregate nominal value of share capital will be £100.
The phrase ‘share capital' is also often used interchangeably with ‘statement of capital' to denote the number and type of shares issued, as well as their value.
Which leads us onto our next key question,
What is share premium?
Share premium is the value the shares are sold at (this is likely at a higher figure than the nominal value).
This page will guide you through the following steps and common queries:
- Nominating shareholders and directors
- Deciding which types of shares to issue
- Choosing how many shares to issue
- Issuing shares checklist
- Other types of legal structure to consider
Nominating shareholders and directors
When you form a limited company you'll need to:
- Nominate shareholders and directors
- Decide how many shares to allocate
- Decide how much share capital to put in at the beginning
What's the difference between shareholders and directors?
Companies are managed by directors and owned by shareholders (also referred to as ‘members'). You can be a director and a shareholder.
Shares are issued (or allotted) to shareholders to ultimately define their liability should the company fold, and at least one share must be issued from the outset – although variations can be made later down the line.
On a day-to-day basis, the number of shares also denotes the shareholders' entitlement to dividends and votes in shareholder meetings.
What types of shares can companies issue?
- Ordinary shares
Normally, ordinary shares are issued by small companies, which will have full rights to dividends, voting at meetings and entitlement to capital should the company fold.
- Ordinary shares
- Preference shares
However, the company could issue ‘preference shares', which have a fixed right to dividends and no voting rights.In addition, ordinary share capital could be sub-divided into segments denoted by A, B, C etc. This set-up facilitates the payment of dividends at different rates.
- Preference shares
- Alphabet shares
You may come across this where shares are being issued to employees. For instance, where the company wants to reward its staff with dividends according to their seniority or performance.
Choosing how many shares to issue
Contrary to popular belief, for small companies there isn't really a recipe to follow when deciding on the share structure.
If you are to be the only director and also the only shareholder, you could simply issue one share to yourself.
Alternatively, you could issue a very large number of shares, perhaps to reflect the shareholders' investments pound-for-pound. But the shareholders must physically pay for their shares, so this could be costly.
Most commonly, you see one hundred shares issued in small companies. This allows the allocation of the shares to reflect the shareholders' commitment to/their control of the company, while being inexpensive.
If you are unsure about how many shares to issue or the structure, you should seek professional advice from an accountant. Otherwise, you could end up making the share structure unnecessarily complex or not fit for purpose.
Issuing shares checklist
This list only deals with very straightforward share issues; for example, where there are no unusual restrictions in the Articles of Association/shareholders' agreement and there is only one type of share being issued.
- If the company was incorporated under the Companies Act 2006, check that the company has sufficient ‘authorised share capital' to issue the required number of new shares. Authorised share capital is effectively the ‘pot' from which shares can be issued.
- Check that the directors have authority to issue new shares. This could either exist in the company's Articles of Association or in an ordinary resolution passed by the shareholders.If no such authority exists, the shareholders must hold a general meeting to pass an ordinary resolution. Or produce written resolutions, which must then be filed with Companies House within 15 days after it is passed.
- Check that the issue of the shares complies with any pre-emption rights or other restrictions in the Companies Act, Articles of Association or any shareholders' agreement.Again, if there are any restrictions, you may be able to get them varied by holding a general meeting or written resolution.
- Write to or verbally offer the shares to the intended recipients.
- Hold a general meeting or produce a written resolution to approve the issue. If a meeting is held, produce minutes of the meeting and file within the company's statutory records. If a written resolution is completed, file within the company's statutory records.
- Upon receipt of acceptances and the payments due from the recipient(s), complete the Companies House form SH01 which can be downloaded from Companies House's website. Send the completed form to Companies House at the address shown on the form. The form must be filed within one month of the allotment of shares.
- Complete the share certificates and file them in the company's statutory books. This should be done within two months of the board making the allotment.
- Update the company's Register of Allotments and the Register of Shareholders which is located within the company's statutory books. This should be done within two months of the board making the allotment.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.
Where can I find out the share capital of my business?
The number of shareholders their shares must be stated in the Memorandum of Association.
Other types of legal structure to consider
You need to decide whether to register as self-employed and become a sole trader, form a partnership or set up a limited company or limited liability partnership – this decision will impact whether or not you'll be able to issue shares.
For more on what each of these structures involves, the pros and cons of each and what your respective duties and obligations are, read our guide on how to choose the right legal structure for your start-up.
You should now feel in-the-know when it comes to issuing shares and share capital, how to nominate shareholders and which types of shares you should issue.
You should also have some idea of which legal structure would be best for your business, for more information on this, follow the links throughout the piece for further detail.
Please note that this article is intended to inform rather than advise and is based on legislation and practice at the time of writing. To speak with a professional, we recommend FreshBooks – a piece of accountancy software, specifically designed for small businesses.