A Guide to Shareholders and Share Capital 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

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