Selling funds in a private limited company to raise funds can be an exhausting as well as a challenging task due to various reasons. For example, the selling shares requires investors whom a limited company will sell the shares. On the other hand, the company is liable to lose control over the company. Therefore, they cease to hold complete control over the company’s decisions regarding certain important matters. For that reason, selling shares is the last option to raise funds if the manager or the entrepreneur fails to raise funds from other sources.
In this blog, we will discuss what is selling shares in a limited company and why it is important. Moreover, we will discuss the different types of shares and how to sell them following a legal and a fair process to make in a private limited company in the United Kingdom. So, let’s start!
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What is Selling Shares in a Private Limited company?
Selling shares is more convenient as compared to borrowing money or a loan from a bank. The reason is the absence of any interest rate attached to the loans and the repayment of the loan. However, there is one drawback of losing a certain level of control over the company.
For example, when you sell shares to an individual or an investor, they become the partial or full owner of the company. As a result, your control over the company becomes limited or restricted. In case of a loan, the control over the company does not change, but the liabilities of a form do increase because of borrowing money from a bank or creditor.
When an investor buys shares in a limited company, they become eligible to earn a dividend on their shares. They have to pay a Capital Gains Tax (CGT), if the investors have earned a profit on their shares in the form of a dividend and in excess of CGT threshold.
Why is Selling Shares Important in a Private Limited Company?
The selling of shares in a private limited company can happen for various reasons. For example, the entrepreneur is planning to retire or is relocating or switching their business. The other and the most important reason, also currently used by the startups, is to raise funds.
Just as startups, sell their shares of a business to win some funds from the angel investors, private equity firms or the incubators. Similarly, the private limited companies sell their shares to the interested investors in exchange for some equity. This is the reason that this type of getting funds is known as equity finance.
Types of Shares
The types of shares a company sells are not the same in kind. They differ from each other, depending on the type of shares they issue. In the United Kingdom, private companies have as many shares as they desire as no legal obligation exists on the number of shares issued to get funds. Here are the types of shares a company issue when they want to raise funds:
- Ordinary shares
- Preference Shares
- Non-voting shares
- Corporate Bonds
- Redeemable Shares
What is the Process of Selling Shares?
Typically, a private limited company sells shares to relatives, family members or friends. They also issue shares to their employees, also known as Employee benefits. On the other hand, they can give shares to capital firms or angel investors to get huge funds in return for equity.
The process of selling shares begins with the decision of the types of shares. Besides, how much you need funds to carry out your business activities and operations conveniently and seamlessly determine the share types.
Secondly, ensure your decision of selling shares completely aligns with the Companies Act, pre-emption rights, shareholder’s agreements and letters of association. Any discrepancy may lead to legal action against the company.
Thirdly, sell your shares to the existing shareholders as prescribed in the pre-emption rights. Otherwise, you can issue shares to new investors with proper application forms, in case the existing shareholders are not interested in buying more shares from the same company.
Fourthly, issue the shares to the potential shareholders and investors through board resolution. You have to inform the Companies House by filling in the SH01 form and attaching a copy of a shareholders resolution.
Lastly, the documentation of the new shareholders begins when you allot new shareholders into your Confirmation Statement. This is the most tedious task to ensure each shareholder gets their due share in the form of a dividend, as they are the partners in a company’s profits.
The Bottom Line
In equity finance, private companies sell their shares partially or completely to other investors to get the cash or funds. The company often needs cash to expand its business, launch a new product, market its product or for maintaining a smooth cash flow record.
The biggest advantage of selling shares is that the firm does not have to make any interest payment for many years and they are free from any type of repayment liability. Nevertheless, they cease to fully control or manage the company. After reading this article, you are able to understand the selling shares in a private limited company to raise funds. Now, you can weigh down the pros and cons of carrying out this procedure before you reach a final decision.
Disclaimer: All the information provided in this article on Selling Shares in a Private Limited Company is general in nature. It does not intend to disregard any of the professional advice.