5 min read

What are shares and shareholders?

A limited company is a separate legal entity in its own right. It is owned by its shareholders who each buy one or more shares in the company. This page will give you a brief overview of what shares are, and what they mean when you want to form a limited company.

What are shares?

A limited company is a separate legal entity in its own right. It is owned by its shareholders who each buy one or more shares in the company.

In return for investing into the company, the shareholder receives certain rights in the company.

The number and value of shares held by each shareholder determines how much control and voting power they have in the business, the percentage profits they are entitled to, and the limit of their financial liability for business debts. Shares can be sold or transferred to other people or corporate bodies.

What types of shares are there?

The two main types of shares that are issued are

  • ordinary shares and
  • preference shares. 

However, there are a number of less common shares that can be issued.  

To make sure you have the right structure for your company, you should speak to a professional who will help you understand which shares are suitable for your company.

Ordinary

The majority of companies issue ordinary shares to most of its shareholders.

They carry rights to vote at general meetings of the company (usually one vote per share), and are entitled to dividends.

Preference shares

Typically these have the right to receive a fixed percentage of profits before others (usually ordinary shares).

This makes them similar to a loan. However, they often carry no voting rights, so can’t influence general meetings.

How do I issue shares when I start up my business?

When a company is first created, one of the things that must be done is for the Registrar of Companies to be told how many initial shares it has, and who owns these shares. The easiest way to do this is to use a Company Formation service. This can be done on the Companies House website.  

Accountants and lawyers will also be able to form the company for you and again will be able to advise on the most suitable share structure.

Can I issue more shares once my business is established?

Yes, and this can be a great way of generating investment into the business. Although issuing further shares is a complex process and should be done only with expert advice.

There are ramifications for existing shareholders should you just issue more shares as the existing shareholdings will be diluted  – i.e. the existing shareholders will own a smaller (diluted) percentage of the company, and the value of the shares may be hit. 

How much should shareholders pay for shares?

Shares each have a nominal value, which is normally (but not always) £1. This is different to their actual value, if and when they are sold.

There are a few schools of thought when issuing the first shares. Typically they will still have a nominal value of £1, and it is the number of shares issued that varies.

For example, you may invest 1 share in your company.

  • With a nominal value of £1 this means you will pay £1 out of your personal funds into the company’s bank account.
  • This is good as it limits the amount you have to pay out personally but means that the company only has £1 in funds to use in the business.

Conversely, you might choose to invest £1,000 and therefore receive 1,000 shares.

  • While this means that the company has more funds to use, it means that in the event the company has to stop trading you would have a personal liability of £1,000 (rather than £1 in the first example).

When issuing new shares, the value that should be paid is dependent on a number of factors including the past and future performance of the business. Many accountants will specialise in valuing businesses and can help you work out how much you should be receiving in exchange for further shares being issued.

What records do I need to keep?

For each share you issue, a share certificate must be created.

This contains details of:

  • the ownership of the shares (name and address of the shareholder)
  • the company’s name, registered number and registered office
  • the date the share was issued, the type of shares,the number of shares covered
  • a unique share certificate number.

The share certificate certifies that a person is the registered owner of shares in a company on a specified date. However, the company must maintain a register of members that provides legal proof of ownership of shares in the company and it is this register that is considered definitive proof.

Therefore you should ensure that the share certificates and member of registers are both complete and agree with each other.