Shareholders are the owners of a company. When a company is created, it raises funds to start trading or making investments. Each shareholder makes an investment in exchange for a share (part ownership) of the company. Consequently, the ownership of a company is shared collectively by all the shareholders, who have a collective say in how the company is managed. However, individual shareholders do not have the above privileges. Moreover, directors are appointed by shareholders to manage a company.
Shareholders Vs Subscribers
A shareholder is a designation given to someone who owns shares in a limited company.
Subscriber’ is a term used by Companies House for a person who becomes a shareholder at the time of a company’s incorporation.
Various names given to companies limited by shares.
Limited Company, Company Limited by Shares, Limited Liability Company, Private Limited Company (PVT) or Private Limited Liability Company: these are names used to describe companies owned by shareholders having limited liability. PVTs is a term that is used overseas and not in the UK. The use of the word ‘limited’ when describing a company refers to the liability of the shareholders. The total loss a shareholder can suffer is restricted to the value of their investment in the share capital of the company. Moreover, the shareholders of a company cannot be made to pay a company’s debts if it incurs losses and is unable to pay its liabilities from its own funds. It is the shareholders’ limitation of liability that makes limited companies a popular choice for businesses. Additionally, shareholders can invest in companies knowing that their personal funds (which are not invested in the company) are secure. Further, very few people start a business if the family home and personal assets are put at risk.
Public Limited Company (PLC)
A majority of companies set up in the UK are limited companies that are privately owned and have a relatively small number of shareholders. PLCs are larger companies whose shares can be offered to members of the public and may or may not be listed on a stock exchange. They require at least £12500 paid up share capital and must appoint at least 2 directors and 1 qualified Company secretary. Formation of PLCs is not a service we offer.
Share Capital defined
The definition of share capital is the total value of the funds a company has raised by issuing shares. Share capital is not repayable to the shareholders; it is a permanent investment given in exchange for ownership. However, this shareholding (investment) can be bought and sold in full or in part.
The total share capital
A limited company’s share capital is the number of shares issued times the nominal value of those shares. Therefore, a company that starts with 100 shares of £1 would have a share capital of £100 (100 x£1).
Minimum and maximum share capital
At least 1 share must be issued to create a company. Fractions of shares cannot be issued; only whole numbers can be issued: 1, 10, 100, 1000, etc. The nominal value of a share is usually £1 but it can be more or less than that. It can also be designated in other currencies such as euros or dollars. There is no maximum amount that can be issued. However, shareholders may eventually have to pay for their shares, which is why some thought needs to be given to the total amount issued.
Setting the nominal value of shares when incorporating a company
When shares are issued, they are assigned a nominal value. This figure is entirely notional and given for bookkeeping purposes only. Moreover, companies with only one owner quite often issue 1 share of £1, so the share capital would be £1 (£1X1). This keeps the accounting simple. However, it is possible to issue shares of 1p (e.g. £0.01) or even less (e.g. £.001). Therefore, some consideration should be given to the quantity and nominal value of shares being issued.
- If there are plans to issue shares to several shareholders, the number of shares should be sufficient to deal with the issue. If there are only 2 equal shareholders, the issue can be restricted to a total that is easily divisible by 2 (2, 10, 20, 100, etc). If there are 20 or 30 shareholders, you might want to issue 10,000 or 100,000 shares.
- Shareholders should be able to afford the subscription. Therefore, if you are issuing 100,000 shares, you might set a nominal value of 1p or £.01 and the share capital would be £1000.
Changing the share capital of a company after incorporation
It is possible to change the number of shares issued and their nominal value after the company is incorporated, but this involves paperwork and, consequently, time and expense. Thus, it is best to give this matter some thought at the time the company is being set up.
Classes of share capital
It is possible to issue shares with different rights. As an example, shares are normally issued with full voting rights and the right to share in a dividend. However, it is also possible to issue shares with no voting rights and only a limited right to share in a dividend. Any number of variations are possible. Our group company 1stchoice Company Formations Ltd provides this facility.
Nominal Value Vs Market Value of Shares
The nominal value of a company’s issued shares has no relationship with its market value. Consider shares that are traded on a stock exchange: they frequently go up and down in price to reflect their true value but their nominal value in the company’s accounts remains the same. As a result, a public company that has issued shares for a nominal value of £1 might have its shares traded on the stock exchange for, as an example, £9 per share or 50p per share depending on what investors think the company’s shares are worth. The same is true of shares in small private companies, but their shares are not traded on a stock exchange and there are no instant means of valuation.
Paid Shares, Partly Paid Shares, Unpaid Shares, Subscriber Shares, and Unpaid Shares
Shares can be issued as paid up, partly paid up or nil paid
A share with a nominal value of £1 can be issued as fully paid, which means that the subscriber pays £1 for that share. In addition, shares can be issued as partly paid, for instance, 60p for a share with a nominal value of £1. This means that the subscriber pays 60p for that share and will have to pay 40p on a future date depending on the terms set out in the Articles of Association. Shares issued unpaid require no payment on subscription, but a commitment to payment of the nominal value on a future date or an event.
Shares not paid for
When a company is incorporated, it has no bank account. Therefore, subscribers to the share capital of the company cannot instantly make payments for their shares. Consequently, the company’s balance sheet will show that the shareholders owe their company the amount for which they have subscribed. However, this does not mean that the shares have been issued partly paid or nil paid; it simply means the shares have not been paid for. Depending on the circumstances of the company, it may well be possible that the shareholders never pay for their shares directly, but the matter is dealt with as an accounting entry on a future date.
Demand for payment
When a company becomes insolvent, the liquidator can ask shareholders to pay the company any amount owed for the shares for which they have subscribed. The payment will be used to settle the creditors of the company. Hence, careful thought should be given to the number of shares being issued and its nominal value when a company is being incorporated. If the company has only issued 1 share of £1, the liquidator can only ask for £1, assuming it is not paid for at the time of the liquidation.
Issued vs Authorised Share Capital
Until the implementation of the 2006 Companies Act, a company’s Articles of Association stated the maximum amount of share capital it was authorised to issue. Historically, companies would allot (issue) less than they were authorised to and leave an amount in reserve for later issues. Moreover, the 2006 act simplified the process of changing a company’s issued share capital, and the requirement to distinguish between authorised and issued share capital became redundant.
Voting Rights, Ordinary Resolutions, Special Resolutions, and Extraordinary Resolutions
When considering how to divide the shareholdings amongst subscribers, Company Law should be considered. Although shareholders can also be directors of a company, it is the primary shareholders who have the final say in a company’s management. Shareholders’ decisions are made by passing resolutions. There are three types of resolutions:
Ordinary resolutions require a 51% majority. All matters can be dealt with by an ordinary resolution unless the Companies Acts, the Articles of Association or a shareholders’ agreement state otherwise.
Special resolutions and extraordinary resolutions require a 75% majority. Significant matters are dealt with by special resolution, such as change of company name, reducing share capital, allotting more share capital, altering the Articles of Association (the constitution of the company), issuing different classes of shares, winding up a company, and/or re-registering a company
A shareholder who wants to retain control of a company because they are making a larger investment than the other shareholders may have to consider owning 75% of the voting shares. If 2 people invest in a company and receive an equal number of shares, they are effectively “deadlocked” and unable to have any resolution passed.
Transferring Shares in a Private Limited Company
To transfer fully paid shares
You will need to complete Form J30, which can be downloaded from the internet and will ask you to provide details of the buyer and seller of the shares.
To transfer partly paid shares
You will need to complete Form J10, which is also freely available on the internet.
The share transfer will need to be recorded in the statutory books of the company. If the value of the share transfer exceeds £1000, you will need to send the form to HMRC to settle the stamp duty that would be due.
It is the responsibility of the directors to issue share certificates to the shareholders. When shares change hands, the directors will need to issue new certificates. Share certificates prove ownership of the shares detailed in the certificate. Directors are obliged to issue the certificates within 2 months of the date of the share transfer. Certificates contain the following information:
- The date on which it is issued.
- The name and address of the shareholder.
- The number of shares held.
- The class of shares.
- The amount paid or treated as paid on those shares.
There is no requirement to provide details of the transfer of shares to Companies House at the time of the transfer. The annual confirmation statement will include that information.