Limited companies sometimes sell shares as a way of raising funds for the business. Known as equity finance, one of the advantages is that you won’t need to pay interest or make repayments on it like you would with a bank loan or an overdraft.
There are other considerations though, so in this article we’ll go over the legal process, and what impact this might have on your company.
When a person has shares in a company they own part, or a ‘share’ of it. One of the perks of being a shareholder is that you’re normally entitled to receive dividend payments (although you’ll need to declare these and pay dividend tax on your income!).
Dividends are paid from the profits that a company makes, so if the company does well and makes lots of profit, the shareholders can expect a larger payment. Some people deliberately invest in new or smaller companies they suspect will perform well, buying shares in the business whilst its small, and then earning healthy dividends as it grows.
It isn’t always that straightforward though, because if the company doesn’t make a profit, it’s not allowed to make dividend payments to its shareholders. Some shareholders might be ok with this for a short while, but if the company never gets off the ground, then they might not make any money, or even get their original investment back, so there is an element of risk involved.
Who can buy shares in a private limited company?
The shareholders in most private limited companies are people involved in the business, or their friends and family. If you want to use your company shares as a way to raise money though, you might sell them private individuals, or even make a more formal equity funding agreement with a venture capital firm or a business angel.
Business angels are people or organisations who invest in businesses, but who might not otherwise have a connection to it.
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Can I sell different types of shares to different shareholders?
Hold on to your hats, because this can get a bit confusing! Companies can issue different types of shares, as well as different classes of shares. Issuing a variety of shares can help a limited company be more flexible with what its shareholders are entitled to.
For instance, you might want to pay one group of shareholders dividends at a higher rate, restrict their ability to make decisions about the company, or buy the shares back from them at a later date.
Different types of shares
There are four main types of shares:
Cumulative preference shares
These are the most common type of share, giving the shareholder one vote for each share without any special rights or restrictions. Although they may provide the best financial gain, they’re also high risk.
Individuals with preference shares have the right to be paid before any other shareholder so, like the name suggests, they get preferential treatment.
If the business is wound up, this type of shareholder is paid before other types of shareholder.
Cumulative preference shares
These give the shareholder the right to be paid a dividend in the following year if the company doesn’t make enough profit to declare dividends in the current year.
The limited company can buy these shares back at a later date, either on a fixed date or when the company chooses.
Different share classes
Share classes are sometimes referred to as alphabet shares because tend to be recorded in the company’s records as ‘A’ shares, ‘B’ shares, ‘C’ shares… and so on. Limited companies issue alphabet shares because it allows them of the way they’re recorded in the accounts, companies often use these to give their shareholders different rights.
For example, you could set up your share structure so that Ordinary ‘A’ shares entitle the shareholder to a percentage of the profits for each share they own but no voting rights, whilst Ordinary ‘B’ shares permits voting rights, but without receiving dividends.
Once you agree a price, the existing owner of the shares will need to complete and sign a stock transfer form, and give this to the new owner. The company directors must make sure that the share register is updated.