Selling Shares to Raise Funds in a Private Limited Company

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.

Why buy shares in a private 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 the company isn’t allowed to make dividend payments to its shareholders if it fails to make a profit. Some shareholders might be ok with this for a short while but they might not make any money, or even get their original investment back, if the company doesn’t get going, so there is an element of risk involved.

Who can buy shares in a private limited company?

Almost anyone can buy company shares, though the shareholders in most private limited companies are people involved in the business, or their friends and family.

If you want to use company shares as a way to raise money though, you might sell them to private individuals, or 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.

Do I have to sell my own shares to raise funding?

No, you won’t need to sell your own existing shares to someone else if you don’t want to. This partly depends on whether you’re raising money for yourself or for the company though!

• Issuing new shares: Also known as primary funding, It’s actually quite common for companies to create brand new shares and sell them to investors as a way of getting money into the business. This does mean you’re sharing the company with more people though, which dilutes your ownership.
• Selling your own shares: Selling some or all of your own shares is a bit different because you own these personally, so the cash goes directly to you – not the company. Doing this means you no longer own the company, or at least own less of it if you only sell a portion.

Can I sell different types of shares to different shareholders?

Yes, companies can issue different types of shares, as well as different classes of shares. Hold on to your hats, because this can get a bit confusing!

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 than another group, or restrict what decisions some of your shareholders are allowed to make.

Different share classes

Share classes are sometimes referred to as alphabet shares because they 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 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.

The company can decide what share structure it wants to use, which can be particularly useful if you want to issue shares which you then sell to investors in order to raise money for the company’s next project!

What happens when shares are sold?

There are a few reporting requirements to take care of after selling or transferring shares to someone else, including letting Companies House and HMRC know.

• Report the transfer of shares which already existed by filing a confirmation statement
• Complete an SH01 if you created brand new shares
• Update the register of members, directors and ‘persons with significant control’
• Prepare and sign a Stock Transfer Form, and give this to the new owner
• Tell HMRC about any shares you sold personally if you need to pay Capital Gains Tax

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