Understanding the concept of limited company shares is highly crucial, for shares determine the ownership stakes of its members and how the company wants to attain its future goals. Moreover, the concept of issuing new shares in a limited company can be a bit of a head-scratcher, if it’s your first time setting up a limited company. In this blog, we will outline all the crucial steps to help you understand how to issue shares in a limited company.
You can understand the formation of a limited company by reading our guide: How to set up a limited company?
First and foremost, you must determine the purpose of issuing new shares in a limited company. Primarily, the allocation of shares must be consistent and compatible with your company’s future objectives.
More often than not, shares are pieces of stock that a limited company allocates to raise capital or funds. Unlike the share transfers, where a company can receive no new finance, share allotment can equip a company with a significant capital to grow or advance the business.
Similarly, a company can attract new investors to pour capital into the company, or reward employees for acknowledging their contributions.
Speaking of shares, before you know how to issue new shares after company formation, you must aware yourself with how shares represent the ownership stakes of shareholders. Therefore, go through our respective guide to gain all-encompassing knowledge on the subject of limited company shareholders:
A comprehensive guide to limited company shareholders.
Consider your Articles of Association:
It is essential to carefully review your company’s Articles of Association to ensure you can make an authorised move to issue shares and fulfill any requirements necessary to understand how to allocate shares in a company.
To clarify, if the Articles of Association include the following restrictions, you must amend them before issuing shares:
- A limited company cannot issue new shares beyond the total authorised share sum if there is a clause of authorised share capital in its articles. Therefore, to remove or change this provision, all shareholders will have to pass a special resolution.
- Similarly, the optional provision of pre-emption rights also prevents you from issuing new shares. It is noteworthy that this clause is exclusively meant to protect the rights of existing shareholders. For example, by issuing new shares in a limited company, the overall value of the present shares reduces compared to the percentage of the business they represent. Consequently, with pre-emption rights, existing shareholders are always preferred to the new investors when it comes to purchasing the existing shares. However, if the existing shareholders waive these pre-emption rights, you can issue shares to new investors.
- Lastly, if the articles have authorised the directors to approve the allotment of shares, shareholders must seek their sanction first. More specifically, the directors can allot new shares to outside investors or the current shareholders as part of a share division. On the contrary, shareholders can modify the articles to restrict directors’ powers regarding share issuance. In this scenario, share allotment will now require the shareholders’ approval.
After carefully reviewing your Articles of Association, it’s time to determine how many shares should be issued and what type or class they will belong to, i.e. ordinary shares, preference shares etc.
It is noteworthy that share class will determine the dividend claims, voting rights, and profit entitlement of the new shareholders. Therefore, ensure that new share allocation will show the desired ownership and voting rights of the new shareholders.
Additionally, to learn more about different share classes, read our detailed guide:
What are the different types of shares in a limited company?
Offer the application form to the recipients:
After determining how to issue shares in a limited company, you can offer the shares to the intended recipients as a company owner and member. You can do it verbally or in writing. It is worth pointing out that a private company must allocate shares in a way that is not interpreted as an invitation to the public to take up the shares.
Now, the investors intending to own the shares issued by the company for shares will complete a relevant application for acquiring new shares. Therefore, after including all the particulars in the form, they can return the form to the company in addition to shares payment.
Pass a board resolution:
Next, you should summon a board meeting for the directors to consider the received application forms. It ensures that all the stakeholders in the company are considered while making an important decision. In addition, a board resolution will be adopted to approve the share allocation.
To go into detail, the board resolution shall:
- Approve the share issuance;
- Approve the candidate’s applications seeking to acquire shares;
- Declare who the shares are being allotted to;
- Issue instructions to submit the required form(s) to Companies House;
- Allow the issuance of share certificates for the ownership of the new shares;
- Instruct to make the necessary updates to the register of members and register of allotments.
Lastly, it is advised to document the decision made after resolution in the meeting minutes for official records.
Issuing share certificates to the recipients is another crucial step to understanding how to issue shares in a limited company. This is because the share certificates verify the ownership of the shares.
Hence, the issuance of new company shares is acknowledged with a share certificate. In addition, you must keep the copies of the share certificates on file for record keeping.
Besides, shareholder certificates are not sent to the Companies House but only to the shareholders.
To learn more about what share certificates contain, read our blog:
What are limited company shares? Things you must know about.
Complete Return of Allotment form:
Fortunately, irrespective of how many shares your company issued at the time of its incorporation, you can always issue new shares at any time later if you want to allot more shares than what your company has already issued.
However, issuing new shares in a limited company requires you to update your company’s information by submitting a Return of Allotment form (also called form SH01) to Companies House. By delivering this form, you notify Companies House of your company’s share issuance.
Furthermore, you need to fill in the following information on this form:
- Company’s legal name;
- Company’s registration number;
- Shares allotment date;
- New shares details, such as their class;
- Updated statement of capital;
- Prescribed particulars;
- Director’s authorising signature;
You can conveniently submit the Return of Allotment form online through the Companies House WebFiling service.
More importantly, Form SH01 must be submitted to Companies House within a month of the share allotment date.
Further, it is not necessary at this point to include the details of the shareholders you have issued the shares. Instead, only the details of the shares are mentioned. Nonetheless, you must include this information on your next annual return to keep up-to-date and accurate records with Companies House.
Update register of members:
Once the company has issued the new shares to new members, updating the register of members with new share allotments and new members immediately is a good attempt. The register of members includes all the details of the members and their shareholdings.
Moreover, an individual effectively becomes a limited company shareholder upon entering their names into the statutory register of members.
Now, after updating the members’ register, you must inform Companies House about the changes through the next confirmation statement.
Shareholders’ details should be updated on the statutory register of members and delivered to Companies House on the next confirmation statement.
Notably, you must meet the deadline for updating the register of members, which is two months after the board resolution has authorised the allotment of the shares.
Update register of allotments:
Likewise, you should also update the register of allotments to include the details of each share issuance. Take note that despite a member already owning shares in the company, you will still have to add a new line into the register of allotments to indicate the allotment of new shares to them.
Update the issuance details in the company’s next confirmation statement:
As previously mentioned, the Return of Allotment form solely contains the details of the new shares issued and not the shareholders. Thus, you must include the new shareholders or members’ names in your company’s next confirmation statement.
Record the newly issued shares in the company’s accounts accurately is also essential to properly understand how to issue shares in a limited company.
For greater clarity, you can do so by closely coordinating with your accountant to ensure that the share allotments are reflected correctly in the financial records for the relevant accounting period. As a result, it ensures that you have maintained transparency and compliance with financial regulations.
Bottom line:
All in all, by properly comprehending the above-mentioned steps, you can easily follow how to issue shares in a limited company. However, if you seek expert guidance from a skilled accountant, the entire process can become even more simplified.
Therefore, visit Accountingfirms and find an ideal accountant from our directory list today to streamline all your limited company matters.