Following on from our guide to forming a UK company, this explanatory guide will go into more depth about limited company shares.
In basic terms, a share represents a portion of a company. To form a limited company, there must be at least one share issued and how much this share is worth in monetary value and in terms of the percentage of the entity, can be determined by the directors.
1. Share capital
‘Share capital’ is the amount of money each share is worth at the initial company formation point, which is when share capital is first allocated to shareholders. In real terms, if your company sold 100 shares which were assigned an original value of £1 each, then that company’s ‘issued share capital’ would be £100.
The share capital amount determines how much money a company could be held liable for in a court of law, which usually concerns unpaid debts in this instance. If the business is unable to satisfy credit agreements or other payments they owe, the shareholders must, by law, pay the value of their shares towards the debt. This face value is usually very low.
A share registrar can advise on the best way to allocate shares for your particular needs.
2. What are the different classes of shares?
There are four main kinds of shares, the details of which will be outlined by Companies House when the company is formed. Each class, or kind of share comes with different rights and conditions attached to each. The four classes are:
You can opt to register a limited company with multiple share classes in operation at once.
3. What is the nominal value of shares?
The ‘nominal value’ of a share is simply whichever amount has been allocated to it. This value is calculated by dividing the value of every share by the total number of the shares, for instance, if a share’s value was £10 and there were 20 shares, the value would be £10 x 20, or £200.
For guidance on where to set your nominal value, you could consider factors like:
- If you have a lot of shares to sell and not many shareholders, will each individual be able to easily afford each unit?
- If there is a relatively high nominal value, the company may end-up using its full allocation of shares more quickly than they would if they had set a lower nominal value.
- The Government imposes stamp duty which has to be paid by shareholders. The amount of stamp duty could easily rise as the company’s share values become greater than the original amount specified during company formation.
4. Why do companies issue shares?
The main reasons for issuing people with shares, which amount to a stake in the company and a say in how it is run (to varying extents) include:
- To raise money, a tactic employed by many companies who ‘go public’ or ‘float’ on the stock market once they reach a point where they believe they are popular enough to persuade potentially millions of people to put money into their business.
- To create a cash surplus which will go towards paying off company debt.
- Increase money that the company has at its disposal for special projects, like building a new workshop or contributing more money to employee pension pots, in line with regulatory requirements.
- To expand by buying another company or more sites or property. Tesco and McDonald’s are two well-known examples of companies who rely heavily on the value of the land they own and strategically buy more, driving out competitors.
5. Issuing shares after the company is formed
If you decide to issue shares to someone after your company has been formed, the directors will need to make this decision and a form SH01 will need to completed and sent to Companies House.
Types of shares, their value, how to set it and the typical scenarios in which shares are allocated and modified should help you to navigate most situations that your company will face. If you prefer an expert to advise you and walk you through these legal processes, then help is always on-hand from a number of reputable sources.
MSP company offers secretarial and legal services which are key to helping businesses of all types and structures to focus on their core responsibilities and improve performance. If you need advice on how to form a company, request a call back.