Shareholders are the owners of a company. They invest capital into a business in return for shares in its profit. A shareholder can be an individual or a company, but doesn’t have to be a director or secretary of the company. A common misconception is that a shareholder has to be a director of a company, but shareholders do appoint directors to run the company on their behalf. Very often, a director will be a shareholder of a company, especially in a private limited company.
A shareholder doesn’t need to be involved in the daily management of a company and may just be an investor. The main benefit of being a shareholder is that you receive a dividend from the company profits. This often works out to be tax efficient as no National Insurance Contributions are deducted on payment of a dividend. As a tax credit is given, a lower rate of tax is also payable. However, the tax credit isn’t repayable and so isn’t advantageous for non taxpayers.
There are four classes of share, the most common being an ordinary share. These shares have no special rights or restrictions. Preference shares dictate that any annual dividends to be distributed will be paid to these shares before any other class of share. A cumulative preference share has a right that if the dividend can’t be paid in any one year, it will be carried forward to future years. Redeemable shares carry an agreement that the company will buy them back either on an agreed date or at the request of the shareholder after a specified period. The company cannot issue redeemable shares only. An ordinary share is the most common type of share, giving the shareholder one vote per share and an entitlement to a dividend if paid out by the company.
Issued share capital is the number of shares currently held by the shareholders of a company. Shareholders have to buy each share for a fixed amount per share. A smaller company would only issue a small number of shares to be able to determine the percentage of the company owned by each shareholder. The profits would be distributed accordingly. If you start a limited company and want to invest a lump sum, you don’t have to issue shares for the full amount. For instance, if you invest £10,000 you can issue yourself with a share of £1 and invest the rest into the business. If the business makes a profit, you can pay yourself the initial investment as a repaid loan from the business as this may be more tax efficient. Professional advice may be required before making a decision.
Share capital of a UK limited company should be established at the time of incorporation. The directors will decide the class of shares and the face value of each share. A new company will usually start with ordinary shares valued at £1 each. It is no longer a requirement to declare the total share capital required. All limited companies have to hold at least one share.
Although it is possible to set up a company without shareholders, it is extremely unusual. Shareholders are preferable to borrowing finance. If a company doesn’t make a profit, no dividends are paid to the shareholders, unlike a business loan which has to be paid back with interest regardless of whether a profit has been made. Shareholders buy shares in a company which they believe will make a profit. They will then be paid a dividend which is a share of the company profits, providing tax advantages for the shareholders.
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An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.