By Rachel Craig
Private companies limited by shares must have at least one shareholder and issue at least one share. There is no limit to the number of shareholders the company has or the number of shares it issues at the time of incorporation or at a later date.
Many new companies are set up with just one individual and this person will be the sole director and sole shareholder. In such instances, the company will issue just one share that will be taken by the sole shareholder. Companies with two shareholders will often divide ownership equally by issuing 2 shares of the same value, with each shareholder agreeing to take one share. Many companies with more than two shareholders will typically issue 100 shares at £1 each, making it easy to determine the percentage of ownership each shareholder has in the company because each share will equate to 1% ownership.
Types of shares
Companies can have many different types of shares that provide varied rights and allocation of profits but the majority of new companies issue Ordinary shares, which means all shareholders have the same rights, responsibilities and share of profits in the company, Most new companies, particularly small businesses and start-ups, prefer to keep things simple by sticking to Ordinary shares in the beginning. It is possible to alter the types of shares issued at any time after incorporation; therefore, the decision you make at the time of registration can be amended as your company grows and new shareholders are introduced. This is particularly beneficial if the initial shareholders of the company wish to retain more control and rights to profit than new shareholders.
Value of shares
Each share issued in a limited company will have a nominal value, which will usually be £1, and the value of the shares is the limit of the shareholders’ liability. In other words, should the company run up any debts, face any legal claims or be dissolved, the nominal value of the shares (not the actual value) is the amount each shareholder is required to pay toward covering the company’s debts – the personal assets of the shareholders is protected because the company exists as a separate legal entity responsible for its own finances. This is a very important form of financial protection and one of the biggest benefits of a limited liability company.
Paying for shares
Shares can be paid for in a number of different ways: some companies ask for payment in cash, others may agree to payment partly in cash and partly in non-cash or wholly in non-cash. Types of non-cash payments may include equipment, goods and services, knowledge and expertise, shares in another company, writing off debt, good will or bonus shares. Shareholders are not always required to pay for their shares immediately, but in the event of the company being wound up, all issued shares must be paid for – this is the limit of the shareholders’ liability so you should not issue or take more shares than you are prepared to pay for, or make the value of the shares too high. Shareholders that have already paid for any shares they have taken will have no further obligation to make any payments to the company if or when it is wound up.
If you are at all unsure of how to divide shares in your new company, particularly if there will be more than one shareholder, it would be wise to consult an advisor or accountant before any decisions are made. It’s better to get it right from the start because making changes to issued shares and the rights attached to each one can be a little tricky after the company has been incorporated. Best not to make any grave errors before you’ve even begun!