For a company limited by shares, shares make the foundation of ownership and control in it. Whether you are setting up a limited company or purchasing shares of one, understanding how shares work is of utmost importance.
Furthermore, limited company shares represent ownership stakes of its members, and their types determine the profit distribution, decision-making authority, duties, and liabilities among members or shareholders.
Therefore, this blog encompasses all the crucial aspects you must know about limited company shares.
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A share shows a portion or percentage of a limited company.
For ease of understanding, consider shares to be like a cake, where each small slice constitutes the whole cake or the cake itself can be cut equally or unequally into several slices. In a similar way, a limited company can be split into shares that will be divided equally or unequally among different members or shareholders.
Further elaborating, in a limited company, a share represents a unit of ownership. For instance, it shows how much ownership you can claim over the company’s assets and profits. You can also sell the shares to investors and traders for the purpose of raising capital.
Notably, when setting up a limited company, the forming members must agree to purchase a part or all of the portion of the share.
Now, when you purchase the shares of a limited company, you will become its shareholder. The more share capital you own, the more stakes you will have in the company.
To know more about what role shareholders play in a company, read our detailed guide: A comprehensive guide to limited company shareholders.
Share capital represents the collective nominal value of all available shares that a limited company issues in the UK. It is also called the aggregate nominal capital.
With the share capital, you can ascertain or determine the total value of a limited company shares and how much financial liability its shareholders will bear in the event of the company’s debts. For instance, a limited company that issues only one share with a collective value of £1 will have a share capital of £1.
Likewise, If a company issues 100 shares, each with a nominal value of £1, its share capital is £100.
It is worth pointing out that the share capital has nothing to do with the company’s total worth. On the contrary, it is proportional to the shareholders’ financial liability. Therefore, if the limited company dissolves or shuts down, shareholders will be liable to contribute the nominal value of their shares in whole to pay the company’s debts.
As mentioned above, limited company shares determine the limit of the shareholders’ liability when the company cannot settle its debts.
For this, it is mandatory that limited company shares must have a value that you can pay (being a shareholder) when they are issued or later at the company’s request in case it has gone solvent.
This total value of the shares is called the nominal value.
More specifically, it is the minimal amount a member agrees to pay for acquiring a single share. Likewise, the total nominal value of members’ shares is the minimum absolute sum you can purchase or sell shares for and are legally obligated to pay company creditors.
It signifies that limited company shares cannot be sold at a value less than their nominal value, nor can they be given away for free. By contrast, if the company has paid up the nominal value of the shares beforehand, it can issue free shares to the present shareholders or family members.
Lastly, although you can set it at any value, it is usually set at £1.
To learn more about the rights and responsibilities of shareholders, read our blog: A comprehensive guide to limited company shareholders.
Unlike the nominal value that members agree to pay to purchase a share, the market value of limited company shares is the amount they are worth at the time they are sold.
The market value often differs from the nominal value since it is the actual value of the shares. As a result, the market value is usually significantly greater than the nominal value in most cases.
When a limited company issues shares at the actual or market value, which is higher than the nominal value, it is considered that shares have been issued at a premium. To clarify, the difference between the nominal value and the market value of the share is called the share premium.
Notably, the limited company members will have to credit the premium to the company’s share premium account.
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Interestingly, there is no restriction, upper limit, or right or wrong number to know the value and number of shares a limited company can have unless it has included a clause of authorised share capital in its Articles of Association.
The number of shares mainly depends on the requirements and preferences of the company’s members. However, how many shares a limited company can issue is primarily based on the number of shares the company created at the time of its registration with Companies House.
For example, a limited company can issue 1 share as a minimum number. It typically occurs when you set up a small limited company as a single owner and director. On the contrary, if, at any point later, you intend to expand your business and raise more capital, you can let outside investors join your company by issuing new shares.
Finally, while you can always issue more shares after the company’s registration, transferring existing ones is relatively easier and faster.
To register a company limited by shares, you need to issue at least one share.
The issuance of a single share shows 100% of the company. Now, if you purchase that single share, you become the sole owner of the whole company. Similarly, by issuing two shares, the company divides itself into two portions. Accordingly, there will now be two members who can own a percentage of the company.
More importantly, the share ownership accompanies certain rights in the company. To illustrate, you receive a certain percentage of a company’s trading profits in proportion to your share value.
Further, you get one vote to decide on crucial company decisions. Hence, the more shares you own, the more votes you will get, the greater power you will have over the business, and the higher profit claim you will have.
Limited companies usually issue shares at an even number, considering the ease of share division among shareholders.
However, the ideal number to issue shares is 1, 10 or 100 shares. Remember that when you issue 10 or 100 shares, it is advised to retain at least 6 or 51 for yourself. Consequently, it will allow you to maintain majority ownership and authority in the company.
More crucially, you must avoid issuing too many shares since it will also raise the financial liability of the shareholders in the event of the company’s financial crunch.
What is a statement of capital?
When you incorporate a limited company with the Companies House, you need to give the relevant details regarding the company’s initial shareholdings in the company formation form. This information is called the statement of capital.
This capital statement contains the total number of shares, their nominal value, the names and addresses of all the shareholders (also called the subscribers or members), and the number of shares each member agreed to purchase.
The capital statement can also include details about the different types of shares (also known as share classes), such as ordinary or preference shares, and their attached rights
If you intend to know how to incorporate a limited company with the Companies House, read our detailed guide:
How to set up a limited company?
In order to verify your ownership of the limited company shares, the document of the share certificate is in place. A share certificate usually contains the company and its share details, such as company name, its CRN (company registration number), registered address of the office, the date you issued or transferred the shares, share certificate number, details of the shareholder(s), signature of directors, number, and value of a share, and what class do the shares belong to.
It is noteworthy that when individuals purchase the shares and become the company’s shareholders, they should obtain a share certificate. Also, the company needs to retain copies of all issued certificates.
Conclusion:
In conclusion, the game of shares and their ownership is undeniably significant for understanding which member has what stakes in the company. By understanding the importance of share issuance and the regulations involved in the number, you can ensure the seamless running of your company in the long run.
However, with the appointment of a professional accountant, you can easily avail the services of shares issuance and transfer. Accountingfirms might be the most optimal option in this regard.
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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.