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Structuring Shares in a Limited Company

10 April 2019

The ownership structure of a limited company is identified by the distribution of share capital and the rights attached. Differing share structures are used to reflect varying levels of input and investment from the respective shareholders.

Number and Value of Shares

Most UK companies are formed with £1.00 shares. This nominal value is not representative of the real value of a company.

The liability of the owners of these shares is limited to the nominal value (in addition to any investments into the company that have already been made). For this reason it is usually unnecessary to issue a large number of shares, exposing shareholders to avoidable risk.

Many companies are formed with a small and easily divisible amount of shares to ensure these can be allocated easily. For example, a company with 3 equal shareholders may choose to issue 3, 30 or 60 £1.00 shares to be allocated equally.

Ordinary

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:

Non-voting

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

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.

Alphabet

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 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.

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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Brendan Corr, Corr & Corr Chartered Accountants

 
 

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