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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, and why companies use 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.

What can shareholders do?

Shareholders are a bit different to directors, although it’s possible for the same person to be both. In basic terms a shareholder owns the company and a director runs it, but owning shares often means that the shareholder is entitled to have some say in larger decisions.

The number and type of shares they own will indicate how much of the business they control, and whether they’re entitled to a payment from the company’s profits. These payments are called ‘dividends’, and shareholders will normally need to pay tax on any they receive. Our online dividend tax calculator will help you work out how much tax you’ll need to pay on dividends.

The majority of private limited companies are ‘limited by shares’, which means they’re owned by shareholders. If you have another shareholder besides yourself, they can help make vital decisions and agree or dispute changes within the business, such as whether or not the business should be sold. You’ll normally need to keep a formal record of any major decisions that are made.
 

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Why do businesses allocate shares?

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

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 that they need. They’re essentially selling shares in the business to raise funds.

Running a business, especially in the midst of a cost-of-living crisis, is tough, so selling shares whilst also bringing other people on board can be an opportunity to invest in areas of growth or promotion, to gain expert advice, and hopefully expand at a much quicker rate. In exchange, your investor will normally receive a share of the company’s profits – known as dividends.
 

 
It does mean that the profits aren’t completely yours, but you may decide it’s worth considering if it means the profits are much larger!

What types of shares are there?

Companies can issue different types of shares in order to give shareholders different rights, such as the ability to vote on decisions, or to receive varying levels of dividend payments. The different types of shares are sometimes known as ‘classes’, or ‘alphabet shares’.
 

Ordinary Shares Known as common shares, these types of shares give members ownership, and the right to vote at shareholders’ meetings.
Non-voting shares This means the member has no right to vote or attend meetings. These shares are often given to employees of the company so some of their salaries can be paid in dividends, which makes things a bit more tax-efficient for all parties, and can be used to reward performance.
Preference shares This entitles the member to dividends ahead of other members who have ordinary or any other class of shares.
Redeemable shares If a member opts for a redeemable share, it often means the company can buy the shares back at a later date. This can be great to give to employees too because if they leave, you can purchase the shares back from them and transfer them to another member.

 
If you find none of these work for you, it’s worth checking out employment-related securities where you gift shares in your company to employees. There are other options too, so make sure you chat with your accountant for more information!

Who can become a shareholder of my company?

In a nutshell, anyone you like! You can issue shares from your limited company to an individual, another company, and even family members. This includes children too, but there can be tax implications to consider when issuing shares to children and what this might mean for their parents – which can get complicated! Things can also become complicated if:

How do I create my initial shares?

A company limited by shares must have at least one shareholder, so you’ll need to provide their information when you register your company with Companies House, as well as information about the shares. This is known as a ‘statement of capital’ and 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 that has 20 shares at £1 each will have a share capital of £20. Your share capital is not linked to how much your company is worth.

 
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 that 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, as long as there are shares available for them. This might mean that you sell or transfer your existing ones, or you might increase the number of shares in your company by allotting (issuing) 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 the changes 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
  • 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.

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 that you can be as tax efficient as possible, especially if you own a company that 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.

About The Author

Rachael Anderson

A creative content writer specialising across business, finance and software topics. I have a love for all things writing, and creating engaging, easy to understand content that helps everyday people! Learn more about Rachael.

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