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.
The share capital of
a limited company has two key elements
The authorised
share capital
The issued
share capital
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Authorised
Share Capital
This is the company's
total share capital and would typically be £1000 divided into
1000 £1 shares. The authorised share capital is the total number
of shares available to the company for distribution. Very few
company's actually issue all of the authorised share capital
from day one, it is more common to just issue enough shares
to split ownership of the company as required. The remaining
share capital is then held in reserve available for issue in
the future if required. Until this reserve share capital is
issued it is effectively meaningless.
The reason companies
have a reserve of shares is to allow for future expansion and
investment in the company. For example, if you wanted to bring
in another partner that was willing to invest £10,000 in the
business in return for a third ownership you can issue another
share to this person. Assuming there are only two shares currently
in issue this would now make 3 in total with each share representing
a third ownership of the business.
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Issued
Share Capital
This is the number of
shares the company currently has in issue. As stated above this
is usually only 2 £1 shares for a new company owned by two equal
owners. 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 replay
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.
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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.
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 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
Please do not hesitate to contact us
if you require further clarification or have any specific
requirements.
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