When you decide to start you own business, you can choose to work as a contractor or set up a private limited company. If you decide on a limited company, you’ll need to appoint shareholders and directors, decide how many shares to allocate and how much share capital to put into the company. This guide will help you understand what share allocation is all about.
Limited by shares
A limited company can be limited by guarantee or limited by shares. “Limited by guarantee” means the members of the company financially back it up to an agreed amount. Such members are not called shareholders.
“Limited by shares” means that the company has shareholders and that the liability of the shareholders to creditors of the company is limited to the capital originally invested. A shareholder’s personal assets are protected in the event of the company folding, but money initially invested in the company will be lost.
Registering your company
When you form a limited company, it must be registered with Companies House. In order to do so, you’ll need a company name, an address, a minimum of one director and a minimum of one shareholder (these can be the same person).
You will also need three very specific documents:
- Memorandum of Association – a written agreement by all shareholders stating their intent to start the company
- Articles of Association – the written rules about how the company is to be run
- Statement of Capital – details of the company’s shares and the rights attached to the shares, for instance whether members can vote on company matters and how many votes they get
Shares and shareholders
So if your new company is to be limited by shares, how do you issue these shares, how many should you issue and to whom? There is no fixed recipe for setting up a limited company’s share structure. The company must, however, have at least one shareholder, who may also be a director. Should you be the only person involved in the formation of the company, and therefore the only shareholder and director, you may simply issue one share to yourself. If there are five of you starting the business, you may decide to issue 100 shares at £1 each, with each shareholder issued a proportion of the shares. Your starting capital would therefore be £100.
While there is no maximum number of shareholders allowed, you should consider the appointment of shareholders carefully, as every decision you make at the onset of your business can affect it down the line.
As mentioned previously, shares issued to shareholders ultimately define their liability should the company go under as well as their entitlement to dividends and votes in shareholder meetings.
Shareholders who are issued “ordinary shares” will have full rights to dividends, voting at meetings and entitlement to capital should the company fold.
Shareholders who are issued “preference shares” will have fixed rights to dividends, but no voting rights. This could be the case where shares are issued to employees as an incentive, for instance.
Issuing shares after company formation
Issuing shares down the line is fairly straightforward and consists of the following basic steps:
- Make sure the company has sufficient authorised share capital and that the directors have the authority to issue new shares.
- Offer the shares to the intended recipients – either verbally or in writing.
- The share issuing must be accepted, approved and resolved in writing. This can happen at a general meeting, the minutes of which must be filed in the company’s statutory records.
- When payments are received from the share recipients, you will need to download the Companies House form SH01, complete it and send it back to Companies House within one month.
- Ensure that you file share certificates and update the company’s Register of Allotments and the Register of Shareholders (located within the company’s statutory books) within two months.
- If the shares were paid for, consider any stamp duty that may be payable.
If you are unsure of which structure is best for your new company, or are ready to issue shares in your existing limited company, speak to your accountant.
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