Share Capital – A Guide for Private Limited Companies
23 September 2020
What is share capital?
The share capital of a company refers to the total nominal value of all shares issued to a company. This nominal value represents the ‘limited liability’ of company members, denoting the sum shareholders must pay in the event that the company is wound up. This nominal value is not representative of the real value of the company.
Types of shares
Ordinary shares are commonly used for most simple structures. They are equally proportional with respect to voting powers, rights to dividends and rights to participation in the distribution of capital in the event of the company being wound up.
However, ordinary shares may not be suitable in all circumstances. Examples of alternative share classes and the rights attached are as follows:
A non-voting share class may be used to give shareholders the right to dividends and participation without giving them power over the decision-making within a company. This may be used to issue dividends to friends or family without giving them power to veto any proposed decisions.
Preference shares take priority when dividends are issued. An owner of a preference share would be paid a dividend before anyone holding an ordinary share. This may attract new investors who can recoup their investment before dividends are issued elsewhere.
A company may have “Ordinary A”, “Ordinary B” and “Ordinary C” shares. This could be used to differentiate between the rights each shareholder has. Another common reason for this is to issue dividends unevenly between shareholders.
Choosing and Changing Share Structure
All companies must issue at least one share to form a company limited by shares. For small companies with a single shareholder for example, are often incorporated with only a single share.
Choosing an optimal structure from the outset when forming a new company can prevent disputes between owners. Nevertheless, circumstances can change and the need to amend the share structure of a company may arise. Fortunately it is possible to change the share structure of a company as and when needed. New shares may be allotted, sold, and transferred to new shareholders via the passing of an ordinary resolution. This is passed by simple majority at a general meeting of shareholders, board meeting of directors, or by written resolution. Within one month of a resolution being passed, an SH01 must be filed at Companies House confirming the change in shareholding. A number of different factors will determine the most appropriate share capital for a particular company:
Large Share Capital
Beyond obtaining a trading certificate needed to take a company public, which requires a minimum £50,000 authorised share capital, a larger share capital can be used to make a company appear more financially secure and increase financial flexibility. Lenders and creditors may use share capital as a factor in determining the creditworthiness of a company whilst investors are more likely to back a business with higher share capital. Additionally, some companies opt for a large share capital as an alternative to taking out a loan as there are no interest payments or restrictions involved.
For companies who begin with a small share capital, it should be noted that an increase in share capital can result in the shares of existing shareholders being diluted.
For further assistance on the formation of a company or on the allocation of shares within your existing company, give us a call on 028 9055 9955 or contact us via our website.
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