Most limited companies operating in the UK are ‘limited by shares’. It implies that shareholders own them and play a vital role in the management, growth, and overall direction of the company.
Shareholders invest capital in the business in return for the purchase of one or more shares. Hence, they become beneficial company owners since they receive a proportionate share of company profits.
Moreover, shareholders have several rights and responsibilities based on what type of shares they own. However, it is common to confuse the rights, duties, powers, and restrictions of shareholders.
To this end, this blog comprehensively explains all the aspects related to limited company shareholders so you get all the clarity regarding shareholding concept.
Also, to learn about the limited company benefits, read our guide:
Limited company advantages and disadvantages.
A share is a piece or portion of a company that is limited by shares. Each portion represents a unit or percentage of ownership in the limited company.
Furthermore, a share reflects an owner’s claim to the company’s assets and profits. Besides, shares can be sold to investors and traders to raise capital.
Likewise, anyone who holds the shares in a limited company by purchasing them is called its shareholder. A shareholder is also known as a member of the limited company.
As stated above, a limited company shareholder is any person who holds shares in it. Shareholders own part of a company corresponding to their shares.
More specifically, how much of the company a shareholder can own, control, and manage primarily depends on the number of shares they hold. As an outcome, they secure a percentage of the company’s trading profits in accordance with the proportion of their shares.
To gain a better understanding of how limited company shareholders work, consider the following examples of popular share structures:
If a company issues only one share, it would represent 100% ownership of the company. Accordingly, the shareholder holding this single share owns the entire company straight out.
Similarly, if a limited company issues two shares of equal value, each share indicates that the company has an ownership of 50%. In case there are two shareholders, each holding one share, they are considered equal co-owners. Consequently, each person will own half of the company.
In addition, when a company issues ten shares, with each having equal value, each share indicates 10% ownership of the company. Now, if a single shareholder owns one share, they hold a 10% stake in the company, and owning five shares would equate to a 50% stake.
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Any individual, corporation, or firm who has the legal power to own property, buy company shares, or transfer them in their name can become a shareholder. Further, each shareholder has a right to receive a portion of the company’s profits based on the value and number of their shares.
Although there are no stringent rules for being a shareholder, the companies, in most cases, formulate the shareholders’ agreement to highlight the eligibility criteria of their shareholders. Alternatively, a company can include specific provisions in its Articles of Association to restrict who can and cannot be a shareholder.
Lastly, regarding age, companies mostly issue shares to individuals aged 18 or above, as minors are not able to make contracts or legally binding decisions.
While there is no limitation to the number of limited company shareholders, there must be at least one shareholder to incorporate a company according to the Companies House regulations. Therefore, a company can have just one shareholder or many shareholders.
To know more about the company formation, read our detailed guide:
How to set up a limited company?
While the terms shareholder and director may seem similar to people, given the duties of each, the two are different.
A shareholder owns a limited company by purchasing or acquiring the shares. Now, to ensure the day-to-day operational and managerial activities are carried out smoothly, shareholders can appoint a director to do the job.
However, the same person can be a shareholder as well as a director. For instance, it is a common occurrence in small companies and start-ups where one shareholder also performs the role of a sole director.
On the contrary, for large limited companies, shareholders and directors are different individuals, with shareholders being the beneficiaries of company profits and overseeing the directors’ responsibilities.
Hence, if they are not appointed as directors, limited company shareholders do not conduct the routine running of the business.
Last but not least, just like the directors’ information, some shareholders’ information also appears on the public register.
Members: Limited company shareholders are typically known as members irrespective of whether they became shareholders during or after the company’s incorporation.
Similarly, if the shareholders own more than 25% of the issued share capital or control more than 25% of the business, they can qualify to become a person with significant control (PSC).
Subscribers: The first shareholders or members in a limited company, the individuals who are part of the company’s incorporation and agree to become members are called the subscribers.
By doing so, each subscriber undertakes to set up and become part of the limited company by owning at least one capital share issued by the company.
It is worth pointing out that the shareholders who join a company following its incorporation are not considered its subscribers.
Minority shareholders are the members who own less than 50% of a company’s issued share capital. Consequently, they have little power or control over the company’s management and direction.
Apart from that, since their shareholding proportion is less than 50%, the voting power of majority shareholders can annul or void the collective power of minority shareholders’ votes.
Nevertheless, with a shareholders’ agreement in place, the rights of the minority shareholders can effectively be protected against the unfair monopoly of the limited company shareholders who own more than 50% of the share capital.
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Shareholders’ rights are established by the prescribed particulars attached to their shares, and it is crucial that they are in compliance with the Companies Act 2006. In addition, it is the quantity and type (‘class’) of shares that define the shareholders’ rights.
More importantly, the Articles of Association and shareholders’ agreement must outline the prescribed particulars of each share class.
The following are the rights and duties of a limited company shareholders:
Shareholding: A shareholder can own one or more shares issued in a limited company.
Correct information in the company’s register: Limited company shareholders have the right that their name is stated correctly in the company’s register of members;
Securing trading profits: Limited company shareholders receive company profits in the form of dividend payments or other distributions in proportion to the quantity and value of their shares.
Excess capital: If a limited company is dissolved, shareholders can acquire a portion of the excess capital in relation to their shareholdings.
Free copy of annual account: They can receive a free copy of the company’s last annual account, director and auditor reports, and any other reports the company has sent them for each financial year.
Pre-emption right: Shareholders also have a statutory right of first refusal when the company issues new shares, allowing them to retain their percentage shareholding.
Limited liability protection: The prime benefit of a limited company is that it offers its members limited liability protection. For instance, in the event of the company’s financial collapse or it is unable to pay its creditors, the members’ liability will remain limited to however much their value of shares is.
Change of company name: A shareholder can change the company name.
Change of company structure: shareholders can change the company structure
Appointment and removal of directors: If the director(s) is not performing up to par, a shareholder can remove him and appoint a new director in his place.
Issuance of new shares: they can issue more shares after company creation.
Changing the prescribed particulars: A shareholder can alter or modify the specified details of rights related to shares.
Shareholders’ duties are primarily established by the company’s actions or decisions that are likely to impact their investments. Their duties include:
Approving significant investments: They wield the power to approve substantial investments for the company’s growth and success.
Authorizing the transfer of the shares: A shareholder can approve the allotment or transfer the current shares to other people.
Determining the rights and powers of directors: They grant rights and powers to company directors and also determine their salaries.
Agreeing to pay company’s debts: Shareholders usually agree to contribute to pay company debts up to the limit of the shares they own. Shareholders are financially liable for paying company debts equal to their share value.
There is no mandatory limit on the number of new members that can join a limited company after its incorporation. However, you can add new members in one of the following two ways:
- You can transfer existing shares from current shareholders to new ones.
- You can issue or allot new shares to sell or gift to new members.
Fortunately, you can issue as many additional shares as you want as long as the articles of association do not include a provision of authorised share capital.
Authorised share capital is a constraint or limitation clause that you can include in the Articles of Association. It restricts the total share capital that a company issues to an agreed-upon fixed sum.
Moreover, it is far easier to transfer shares than creating more shares provided you have the shares available to transfer. In most scenarios, directors have the right to issue new shares and approve share transfers. Yet, limited company shareholders can limit directors’ powers in the articles.
Likewise, if the Articles of Association has any provision that prevents a director from approving a share allotment or transfer, the present members will have to pass a resolution to allow the action. For this, existing members can have pre-emption rights if there is a clause in the articles or a shareholders’ agreement that gives them the rights.
It is worth highlighting that pre-emption is a ‘first-refusal’ clause allowing the existing members to acquire additional shares before the company makes them available to outside investors.
If you decide to transfer shares to the new shareholders, you do not need to inform Companies House about relevant details about the new shareholders until your next confirmation statement arrives. Nevertheless, updating this information as soon as possible is a wise choice.
More crucially, It is mandatory for the directors to update the company’s statutory register of members with all the information about the new limited company shareholders at the earliest.
To explain, If any member holds over 25% of the company’s issued share capital or has 25% authority over the business, they become the Person with Significant Control (PSC). Accordingly, the directors must record the person’s details in the PSC register.
Next, new limited company shareholders should receive a share certificate that will validate their ownership within two months of joining the company and becoming a member. It is significant for the company to keep copies of all certificates and any share transfer documents. Lastly, these documents must be kept at the company’s registered office or SAIL address.
A shareholders’ agreement is a private contract between a limited company’s members. It is legally binding in nature. Furthermore, It validates the Companies Act 2006 and the articles of association, outlines the rights and duties of members and directors, how the limited company should be run, and how major decisions should be made.
Although a shareholders’ agreement is not a legal requirement, it is highly advisable for any limited company that has more than one shareholder to draft it. It is imperative to know that the exact terms of a shareholder’s agreement can greatly vary from company to company.
However, its prime objective is to foster transparency, openness, and equality of rights among the members. Beyond that, all members remain fully informed of their obligations, rights, and restrictions in the company. In brief, shareholders’ agreement gives clarity and averts disagreements and conflicts between shareholders.
The shareholders’ agreement often deals with the following matters:
- Distribution of company profits, including dividends, directors loans, and reinvestment in the company;
- Appointment and termination of directors and company secretaries (if they are hired to facilitate the directors);
- Rights, duties, and limitations of company directors;
- Salaries of directors and other forms of remuneration;
- Prescribed particulars of rights attached to shares;
- All the procedures and constraints for the transfer and issuance of shares, including authorised share capital, pre-emption rights, and directors’ rights and duties;
- Company investment and financing;
- Protection of minority shareholders’ rights, such as mandating that company decisions require the collective approval of all member’s, not just a majority vote;
- Change in the structure of the company;
- Dispute resolution and settlement instructions;
- Guidelines and rules for legal proceedings;
- Shareholders’ information rights.
The members can viably draft a shareholders’ agreement before or after company creation. Similarly, whenever all the members unanimously decide to change or update the agreement, it will be altered.
Contrary to the majority of limited company records and documents, a shareholders’ agreement is strictly private and confidential. Therefore, you do not need to display it on public records or make it publicly accessible for the inspection of the company’s statutory registers. In addition, you do not need to file it at Companies House either.
Key Takeaways
Shareholders are the foundation of a limited company since they own shares representing a proportionate stake in the business. They have different rights and duties that impact and determine what direction the company is steering into.
Similarly, the structure and allocation of shares are immensely important in shaping the company’s management and right financial footing. Therefore, appointing an experienced and skilled accountant can simplify the unnecessary challenges of managing limited company shareholders.
With Accountingfirms, you can find the most reasonably priced accountant, who will give you personalised consultation with company formation, shares allocation, tax planning, tax optimisation, and compliance with legal regulations. Thus, visit us today and witness the sustainable growth and success of your company.
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.