A Guide to Shareholders and Share Capital in a UK Limited Company

The following guide is designed to help you understand share capital and the role of a shareholder in a UK limited company.

Introduction

Authorised Share Capital

Issued Share Capital

Share Classes and Currency

Shareholders

Further Information

Introduction

All private UK limited companies which are limited by shares must have a share capital of at least one share. A “private company limited by shares” is the full description for the typical “Ltd” company formed for the purposes of a profit making business.

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Authorised Share Capital

A UK limited companies share capital is established at the time of incorporation. The new directors need to decide on what type of shares they wish to create (the class of share) and the face value of each of those shares. Typically a new company will start with ordinary £1 shares. Further information on share classes is detailed below.

Companies no longer have to decide the total authorised share capital they wish to create. You simply issue the number of shares you need at the time of incorporation and can then issue a further uncapped amount at a later date subject to any restrictions imposed by the Articles of Association for your company.

Prior to the Companies Act 2006 companies would have to declare a total capital at the time of incorporation, for example 1000 shares. The company could then only issue up to 1000 shares in total. If more shares were need at a later date then the share capital would have to be increased by way of resolution. The Companies Act 2006 has removed this cap therefore simplifying share capital for private limited companies.

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Issued Share Capital

This is the number of shares the company currently has in issue, in other words these are the shares held by the shareholders (owners) of the company.

For most start-up companies they only need to issue a few shares to determine who owns a set percentage of the company and will receive the same percentage share of the profit.

For example – if there are two people setting up the limited company and they are equal owners and will share the profit 50/50 then each person simply needs to hold one share each. We would recommend you issue 1 x £1 Ordinary share to each person so there is a total of two shares in issue.

If you had three owners and the ownership was split 50% to one owner, 30% to another and 20% to the final owner you may issue the shares as follows. 5 x £1 shares to owner one, 3 x £1 shares to owner two and a further 2 x £1 shares to owner Three. The total issued shares therefore being 10 x £1 shares with each share representing 10% of the business.

Issued share capital does not have to represent the exact real capital investment you wish to make into your new business. For example, if you want to start your business with a personal investment of £10,000 you do not need to issue yourself with £10,000 worth of shares. You may prefer to only issue yourself with 1 x £1 share. If the business then becomes profitable you may be able to repay yourself the initial start up investment as a repaid loan from the business. This could prove to be more tax efficient, discuss this with your accountant before making this decision.

Please keep in mind that the shareholders have to pay the company for the shares they receive. If you receive one £1 share then you owe the company £1 which should be paid into the business bank account once it has been opened. If you issue yourself 10,000 x £1 shares then you will owe the company £10,000 which will have to be paid into the business bank account for the company to use. You are therefore at risk of losing this money if the business fails; we therefore recommend issuing less shares to reduce your risk and liability to the company.

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Share Classes and Currency

There are various types of share a company can issue and can attach different conditions to each share class. This is subject to the way the company's share capital was initially structured. Generally share types are divided into the following categories:

• Ordinary. As the name suggests these are the ordinary shares of the company with no special rights or restrictions. They may be divided into classes of different value.
• Preference. These shares normally carry a right that any annual dividends available for distribution will be paid preferentially on these shares before other classes.
Cumulative preference. These shares carry a right that, if the dividend cannot be paid in one year, it will be carried forward to successive years.
• Cumulative preference. These shares carry a right that, if the dividend cannot be paid in one year, it will be carried forward to successive years.
• Redeemable. These shares are issued with an agreement that the company will buy them back at the option of the company or the shareholder after a certain period, or on a fixed date. A company cannot have redeemable shares only.

The most common type of share is an “Ordinary” share which is a simple share usually giving the holder of one share one voting right and the holder is also entitled to a dividend if paid by the company.

Typically you would want your share capital to be pounds sterling but you can form your company with the share capital in different currencies or have multiple classes in various currencies.

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Shareholders

The shareholders of a company are the owners. Also referred to as members or subscribers. The shareholders appoint the directors to run the company on their behalf, for new small companies the shareholders are often also the directors but this is not a requirement. A shareholder does not have to be involved in the day to day running of the company. If a shareholder owns more than 20% of the company they will usually need to be identified to the businesses bankers to satisfy UK anti money laundering regulations.

There are no restrictions on who can be a shareholder of a UK company, you can be based overseas or the shares can be held by another company if desired.

Directors do not have to be shareholders or vice versa, neither does the company secretary need to be a shareholder.

The primary benefit of being a shareholder is that you can be paid dividends from the company's profits. This can often be more tax efficient than being a salaried employee as you can avoid National Insurance contributions. Consult your accountant for further information and advice on your personal circumstances.

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Further Information

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