How and When Are Shares Created?

When you run your own limited company, you’re legally separate from it, so rather than ‘being’ the business like a sole trader, you ‘own’ it. This means you’re a shareholder, literally holding a share of the business.

If you’re new to this (and even when you’re not!) it can all seem pretty confusing, so we’ll go through the process of what shares are, why companies use them, and how to create them.

What are shares?

As the name suggests, company shares are really just that – a share of the company. Each share represents a portion of ownership, so if you own all of the shares, you own all of the business. Someone who owns a share is called a shareholder.

Why do businesses allocate shares?

Mainly because they have to! When you set up a limited company you must allot shares to show who owns it and what each shareholder is entitled to, even if it’s just yourself. Allotting shares is useful though, because it’s another tool for raising money.

Using shares to show who’s in charge and what they’re entitled to

Shares tend to include a right to:

• A share of the company’s profits, which is paid out in the form of a dividend
• Vote on major decisions. If you’re the only shareholder then you’ll also have full control of the business, but if someone else owns 50% then you’ll need to agree on major decisions.
• Any profits or gains made when the company is wound up or if you sell your own personal shares

This is quite a general overview though, because companies can create different types and classes of shares if they want to be more flexible with what each shareholder gets as a result of owning them.

Allocating shares can help you raise money for your business

Think of Dragons’ Den! Business owners will go on the show with a thriving business or a potential idea, and offer up a chunk of the company in exchange for the financial investment they need. They’re essentially selling shares in the business to raise funds.

Running a business is tough, so selling shares whilst also bringing other people on board can be an opportunity to fund investment and gain expert advice. In exchange, your investor will normally receive a share of the company’s profits – known as dividends. It does mean the profits aren’t completely yours, but you may decide it’s worth considering if it means the profits are much larger!

How do I create my initial shares?

You’ll need to provide the details of each shareholder and what type of shares they own when you first register your company with Companies House, so this process happens during the initial set up stage. Known as a ‘statement of capital’ it includes:

• The number and type of shares in your company, and their total value (known as your company’s ‘share capital’)
• Information about the shareholder such as their name and address. You might also see them referred to as ‘subscribers’ or ‘members’

For example, a company with 20 shares at £1 each has a share capital of £20. Your share capital is not linked to how much your company is worth.

Record what shareholders are entitled to

You’ll also need to record what your shareholders are entitled to. If you only create one type of ordinary share this is quite straightforward, but it’s particularly important if you create different types (sometimes known as classes) of shares, with varying rights.

This information should be made available in the company’s Articles of Association (the written rules you create which set out how to run the company). It will include:

• Each class of share
• What the shareholder is entitled to (such as voting rights, or a percentage of the dividends)

How do I add a new shareholder?

You can add a new shareholder at any time, either by selling or transferring your existing ones, or by allotting (issuing) brand new ones. If you want to add a new shareholder there are steps to follow:

• Provide the prospective shareholder with an application form to collect their details (you’ll need to register the changes with Companies House)
• If you’re not the majority shareholder, you’ll need to agree any changes with the other directors and shareholders in your business
• Once approved, issue a share certificate showing the name of your new shareholder, and the class and quantity of shares they now hold
• Tell Companies House about brand new shares by completing a ‘Return of allotment of shares’ SH01 form. If you issue new shares, you must tell Companies House within one month, or you have 21 days to report any other changes to your share structure
• Complete a Stock Transfer form if you sell or transfer existing shares to someone new
• Update the register of members
• Include these new changes in the company’s next confirmation statement

Phew! It can be a lot to take in, and it’s always worth chatting with your accountant before making any major changes to your company structure.

Who can I give shares to?

Anyone you like! You can issue shares from your limited company to an individual, another company, and even family members – including children. It’s useful to think about what happens to company shares in different situtations, and plan for this in the company’s articles of association. For example, what happens if:

• Someone inherits your shares as part of the estate following your death
• Your shares become part of a divorce settlement

Can my limited company have multiple shareholders?

Yes! When you set up your limited company, you’ll need to appoint one director and one shareholder. You can, if you don’t have anyone else in your business yet, take on both roles yourself, and name other shareholders in the future if you want to.

Can I own shares in multiple companies?

You can have shares in various companies, but it’s definitely a good idea to discuss any potential investments with your accountant first so you can be as tax efficient as possible, especially if you own a company you run yourself.

How do I remove or update a company shareholder?

If a shareholder wants to leave your company, you’ll need to tell Companies House next time you file your annual return.

Some companies include a clause in the shareholder’s agreement which sets out what shareholders can do with their shares. This might limit a shareholder to only selling or returning their shares to the company or to another existing shareholder.

It can be quite useful, particularly in smaller companies who might want to restrict who else has a say in what happens to the business. Without it, a shareholder might be able to sell or give their shares away however they please.

We understand shares can be tricky to get to grips with, so always speak to your accountant when you need help. Call 020 3355 4047 or get an instant quote online.