Shares play a central role in a limited company since they represent ownership stakes of the shareholders. These shares come in different types, each meeting the specific needs and preferences of the company and its shareholders.
Furthermore, share classes of limited companies determine the rights and responsibilities of shareholders, including their voting rights, dividend, and profit claims. Therefore, understanding the different types of shares in a limited company is paramount for members to know which class is ideal for their business requirements.
In this blog, we will list different types of shares in a limited company to help you decide the most suitable one for your limited company.
Limited company shares come in different types or classes. Each type of share has different conditions and rights attached to it. Moreover, these specific rights associated with each share class are included in a company’s prescribed particulars and Articles of Association.
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The following are the different types of shares in a limited company that shareholders can own to receive different rights:
Ordinary shares are the most commonly used class of shares, and each share provides its owner with basic dividend payment and voting rights.
Although there are different share types, most limited companies in the UK issue ordinary shares. You can consider it a standard share class in which all members usually have equal voting, profit entitlement, and capital rights.
Thus, a limited company’s shares-related matters become simplified by issuing only ordinary shares. However, while this class is the most popular one, it might not be viable for all companies with varying needs.
As a result, you can create additional classes during or after company formation to grant different voting and dividend rights and powers to members. Following are the most common share classes of the limited company apart from the ordinary shares.
A preference class of shares in a limited company allows you to have a preferential right to a fixed portion of dividend payment. For instance, the company will prioritise its profit entitlement over the shareholders with other share types.
The dividend amount is usually a percentage of each share’s nominal value. Hence, preference shares surpass all the other share classes of limited companies for dividend payments.
However, this class has no voting rights, meaning shareholders cannot vote at the company’s general meetings. Likewise, upon the company’s closure, shareholders cannot claim the right to the company’s surplus capital in addition to the dividend amount.
If a company issues non-voting shares, its holders will have no voting right, i.e. they will carry no right to cast their vote in general meetings. As a result, they cannot be a part of the company general meetings either.
However, despite having no voting rights on a company’s important decisions, you can still have the right to claim dividend payments from the company’s profits. Besides, limited companies often issue non-voting shares to family members of shareholders or employees.
Among different types of shares in a limited company, redeemable shares are a class of shares that you can issue with the condition that your company would be able to redeem or take them back in the future.
Further elaborating, issuing redeemable shares is a tax-efficient way for a limited company since the company can buy them back after a fixed length of time or upon the request of the shareholder or company.
Ordinarily, a limited company issues the redeemable shares to its employees on the condition that if the employees depart from the company, it will redeem its shares at their nominal value.
This class of shares in a limited company fundamentally protects and maintains the control of the company’s founding members. The founding members, also called the subscribers, are the company’s original and first owners who joined the company during its incorporation.
Hence, with this class, the subscribers can retain greater authority and control over the business than future shareholders.
Further, unlike the other share classes (that typically carry only one vote per share), the management shares class has multiple votes per share. Consequently, shareholders can have additional voting rights by choosing this share type.
As the name suggests, deferred ordinary shares are a class in which the members holding these shares receive dividends only after all other classes of shares have met their minimum dividend obligations.
Therefore, deferred ordinary shares put you at a disadvantage compared to other shareholders because their dividends depend on dividend payments to those holding preference shares.
In addition, by holding deferred shares, you can generally have the right to vote at general meetings and the right to receive a share of the company’s excess capital upon its dissolution.
Notably, deferred ordinary shares are usually not beneficial and are considered riskier investments since they can produce deferred or delayed returns than other types of shares.
Primarily, a limited company can issue any class or type of share that best fits its share capital structure and the preferences of its shareholders.
Thus, you can viably issue any class of shares in a limited company, no matter if it is during or after company incorporation. However, among different types of shares in a limited company, members often choose the ‘ordinary shares class’, in which there is an equal value of shares so that the members could get equal voting and profit rights.
Alternatively, your limited company can issue different types of shares with different values to give different voting and profit rights to the shareholders based on your company’s requirements.
What are prescribed particulars?
All share classes of a limited company are required to have prescribed particulars. The prescribed particulars include information about what rights each share class will give to the shareholder.
Moreover, prescribed particulars are the information or particulars regarding several rights that come with each share class. These rights include voting rights of shareholders, the right to make important company decisions, their dividend and profit entitlement, and redeemable rights.
It is worth emphasising here that it is crucial to outline all the rights in the statement of capital during the company’s incorporation with the Companies House. Alternatively, you can also include prescribed particulars in your company’s Articles of Association.
A capital statement contains the relevant details regarding the company’s initial shareholdings and share capital structure. To gain more knowledge on limited company shares and shareholders, read our respective guides:
What are limited company shares: Things you must know about.
A comprehensive guide to limited company shareholders.
When you are completing the prescribed particulars section of the statement of capital, it is recommended to follow the following rules of Companies House:
- You should mention all the details of the prescribed particulars for each issued type of share.
- Include all the necessary and meaningful information. It is usually not a good practice to refer the reader to another document for sharing class rights information.
- Similarly, if the company is winding up, you need to include details of voting, dividend, and distribution rights of shareholders.
Conclusion:
In summary, understanding different types of shares in a limited company is essential to determine the ideal share distribution scenario among the shareholders.
However, share classes of limited companies are not restricted to the above-stated shares alone. A company may create any share type it deems fit. The types of shares discussed above are usually the most prevalent among private limited companies in the UK.
Also, a certified accountant can always be of great help in learning which class of shares in a limited company will prove to be optimal in view of your business requirements and future plans.
Thus, visit Accountingfirms today to let your accountant manage all your limited company obligations, including its incorporation, tax filing, VAT registration, and payment, and shareholding dynamics.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.