Issuing shares in a limited company

What does “limited by shares” mean?

Most limited companies are “limited by shares”, which simply means the company is owned by shareholders (commonly referred to as “members”), who (as such) have basic legal rights.

If they don’t work for the business, they have a basic legal right to be sent the company’s annual report and accounts or its memorandum of association (ie agreement by shareholders or guarantors to form the company) and articles of association (ie written agreed rules about how the company must be run).

Companies limited by shares must have at least one shareholder, who can be a director. There is no limit on the number of shareholders a company can have and the price of a share can be whatever you decide. However, shareholders must pay for their shares if the company must close, which is why a low value (eg £1) is often chosen, to minimise shareholder liability.

Issuing initial company shares

As explained on government website GOV.UK:

“When you register a company you need to provide information about the shares (known as a ‘Statement of Capital’). This includes the:

• number of shares of each type the company has and their total value – known as the company’s ‘share capital’ and the
• names and addresses of all shareholders – known as subscribers or members.”

So, a company might have a share capital of £500 after issuing 500 shares at £1 each. Share capital is not linked to the company’s actual value.

The rights that each “class” of share gives to the shareholder must be explained. This information is called “prescribed particulars” and must include:

• their share of dividends
• whether they can exchange their shares for money
• whether they can vote on specified company matters and
• how many votes they’re entitled to.

What rights do shareholders have?

In many instances, a company’s director owns all company shares. Sometimes there are two, three or four directors who divide the company shares between them after going into business together.

Others small companies have shareholders who are not company employees or directors, and these often have additional rights, such as the right to attend and vote at shareholder meetings on key strategic matters (eg the appointment of a new director). Shareholders can’t normally influence day-to-day company matters, however, a majority vote of shareholders can force the removal of a director.

Different classes of company share

A company’s articles may permit the issuing of different classes of shares, which can include “voting” and “non-voting” shares. This can suit companies that want to attract investors, yet keep voting control as is. Different classes of shares can also be issued based on profit rights. Shareholders with the same class of shares have the same rights and company directors must treat all shareholders fairly.

Each shareholder is entitled to receive a share of company profits, determined by the number and value of their shares. Any person or company/organisation can be a shareholder in a private company limited by shares.

What does “limited by guarantee” mean?

As explained on GOV.UK:

“Companies limited by guarantee have guarantors and a ‘guaranteed amount’, instead of shareholders and shares. Most companies have ‘ordinary’ shares. This means directors get one vote on company decisions per share and receive dividend payments.”

Companies limited by guarantee must have at least one guarantor and a “guaranteed amount”. Guarantors are company members who control the company and make important decisions. They don’t normally take profit from the company; rather, money is “kept within the company or used for other purposes”.

Crucially, guarantors promise to pay a guaranteed amount of money to the company if it’s unable to pay its debts. This must be paid in full and can, for example, be necessary when a company is closed down.

Issuing new shares in a limited company

A company might seek to issue new shares as a way to raise capital to fund growth. You must tell Companies House about any changes to your company’s share structure “outside your annual return”.

As also explained on GOV.UK:

“You may need a special resolution to change your company’s share structure if you:

• change the number of shares the company has and their total value
• change how your shares are distributed
• cancel any of your shares
• change your shares into other currencies.

“You must tell Companies House within a month if you issue more shares in your company. [And] you must report all other changes to your share structure within 21 days.”

There are many rules governing issuing shares in a limited company, some more complex than others. Tailored advice from an experienced accountant can save you time and ensure your compliance.