Person on laptop tracking share values

Contents

  1. 1. What is share capital?
  2. 2. What is the difference between the nominal value and market value?
  3. 3. What are shareholders?
  4. 4. Types of shares a company can issue
  5. 5. Can a company issue more shares?
  6. 6. Can a company reduce share capital?

What is share capital?

August 6, 2021
Starting up a new limited company is exciting. The preparation and planning stage is almost complete and you can finally get started with running your business.But before you get incorporated, it's important to take the time to make sure you understand all of the stages involved in this process. In particular, it's vital to know what share capital is and the impact it can have on different aspects of your business.As part of your incorporation, you will need to complete a statement of capital, which provides HMRC with details of your company's issued shares. The number, value and type of these shares can affect the ownership, voting rights and entitlement to dividends, so it's key to know how it works.In this article we'll help you to make this decision by covering what share capital is, what we mean by shareholders, the type of shares that can be issued and how to issues more shares after the process of incorporation.

What is share capital?

Share capital is the total value of shares issued by a limited company to its shareholders. There is no limit on how many shares can be issued, but every limited company must have at least one share. Most companies choose to issue 100 shares as it's a nice, round number to make calculations easier. The number of shares owned by each shareholder determines the ownership, level of control and percentage of the profits that each party has in the business. For example:
    A start-up with a sole director issues 1 share at £1 and has 100% ownership of the director. The total share capital is £1.A company with two directors issues 100 shares at £1, each holding 50 shares. Their ownership of the company is 50% for each director and the share capital is £100.
When shares are issued, shareholders must pay the nominal value – a fixed, arbitrary amount per share – which in this example is £1. Indeed, most companies choose to set the nominal value at £1.

What is the difference between the nominal value and market value?

The nominal value is a fixed value that remains constant for each class of shares issued. When a company is first launched it doesn't usually have a value except for the nominal value. If the company becomes successful and generates profits, the value can increase – this is referred to as the market value.If new shares are issued, the difference between the nominal value and the market value is called the share premium.One of the biggest benefits of setting up a limited company is that your personal assets are protected. Limited companies are their own legal entities and you are not responsible for the debts of the company. If the company does become insolvent, you will only owe the nominal amount of the shares you own – not the market value.This is something to consider when deciding on the number of shares and the nominal value of each share that you issue. The more they cost, the more you could be liable to pay if the company gets into difficulty.

What are shareholders?

Shareholders are simply individuals or organisations who purchase shares and have a stake in a company. A shareholder in a limited company can simply be one director – operating as the sole shareholder and owning 100% of the business – but at other companies, it can be split between several directors and investors. Typically, the number of shareholders increase as a company grows and requires greater levels of funding.Private limited companies are restricted to having a maximum of 50 shareholders but public limited companies have no such limit and are able to trade on the stock exchange. A company usually decides to become a public limited company when they have reached a certain status and profitability but are looking for more market capital to reduce any debt and fuel expansion projects. In comparison to the number of new businesses started every year there aren't many private companies that go public in the UK – only 50 did so in 2020.When you are deciding on your ownership structure, it's important to focus on the number of shares you issue. Every time someone else invests you are diluting your ownership. The fewer shares you own, the less of a controlling stake you have. Depending on the type of shares you issue (which we cover below) you could find yourself being out-voted when it comes to decisions being made about the business. 

Types of shares a company can issue

Most small limited companies will only issue ordinary shares, but there are reasons for using other types of share classes. In the Articles of Association, you can attach different conditions and rights to each of the different classes of shares relating to:
    Entitlement to dividends: Each share class may have the right to receive normal dividends, preferential dividends (the right to receive it earlier than other share classes), dividends in specific situations, or to not receive a dividend at all.Entitlement to capital: If a company is dissolved, the shareholders are due any assets that remain after the company's debts have been paid. Different share classes may have a right to receive any remaining assets immediately, only in specific situations, or not at all.Voting rights: Each share class can specify if shareholders have the right to vote, the right not to vote, or for their vote to carry a certain weighting (e.g. a share class might carry a weighted vote that has more importance).

Ordinary shares

Redeemable shares

Redeemable shares give a company the option of buying them back after they have been issued. If you are creating this share class, then you need to specify what the redemption price will be – the price at which you will buy them back. It's also important to note that redeemable shares can only be bought out of profits from the company or from the proceeds of a new share issue.

Preference shares

Preference shares are so-called because they provide the shareholder with the right to receive dividends ahead of any other share class, whether the company is in operation or in the event of it entering liquidation. However, they mostly have no voting rights attached to them.There are no restrictions about how often dividends can be paid, but most companies will pay them every 3 or 6 months. When, and if, you receive a payment, however, depends on what type of preference shares you hold.

Can a company issue more shares?

Most companies have the option of issuing as many shares as they like unless they have stated any restrictions in the Articles of Association. If a company sets an authorised share capital – effectively a maximum value on the shares that can be issued – then they are only able to issue shares up to that specific value.The reasons to issue more shares mostly relate to expanding the business. If you hire another director or business partner, or if you want to attract additional funding from an investor, you can offer shares as a stake in the business. The process of creating and issuing new shares is referred to as share allotment.Provided there are no restrictions listed in your Articles of Associations regarding shareholders having to vote on shares being allotted, in your capacity as a director(s) can make any required changes.You will need to inform Companies House by completing form SH01 within one month of shares being allotted. On this form you will need to provide the following details:
    CompanyAllotment datesNumber, value and class of shares allottedThe rights of any share classes

Can a company reduce share capital?

If you want to reduce your share capital, you can do this by reducing the number of shares or the value of shares. You might consider doing this to create distributable reserves, as part of a de-merger or to pay surplus capital back to shareholders. As long as there are no restrictions listed in the Articles of Association, you can do this either by way of a special resolution supported by a solvency statement or with the consent of the court. Reducing share capital, as well as the other topics we have discussed, can be a complicated process and it is well worth consulting an accountant for advice. If you are finding it difficult to manage the running of your limited company or you are confused about what steps you need to take to register your company, then have a look at how Ember can help. Our simple accounting solution is geared perfectly to start-ups and small businesses. We can incorporate your company free of charge, help you register a business and director service and provide advice and support from our team of qualified accountants.
Fred Princewill
Fred PrincewillJunior Accountant

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