Limited companies are a separate legal entity to their owners, but they do still need an owner of some sort. These owners are called shareholders, because they hold a ‘share’ of the business.
Most small companies start out with one or two shareholders, who are usually also the company directors. Directors have a different role to shareholders, but it’s possible to be both at the same time – but why would anyone want to be a shareholder? In this article, we’ll look at what shares are, who can own them, and what that means for tax.
Let’s start at the beginning with a description of what shares actually are, as this helps us understand why anyone might want to own them.
At the most basic level a share in a company is, as the name suggests, a share of the ownership.
What’s the point of owning shares?
Owning shares makes you a shareholder and, depending on the type of share you own, this might mean you receive a share of a company’s profits (known as dividends) or have some control over the company.
If you own 100% of the shares then you are the sole shareholder, you own the entire company yourself, and you’ll receive 100% of the dividends. If you own 70% of the shares and another shareholder owns 30%, then you’ll receive 70% of the dividends, and so on.
It also makes you the majority shareholder, so you’ll have control of the business because you own 51% or more of the shares. This means that you have more power over what happens with the business.
Are all shares the same?
Not always! Companies can have different types of shares which can affect what the shareholder is entitled to.
These are the most common, usually giving the shareholder some control over the company and a cut of the profits according to how many shares they own.
They essentially entitle the shareholder to preferential treatment, and they’ll get paid before other share types.
Cumulative preference shares
Cumulative preference shareholders have the right to receive a dividend the following year if there’s no profit in the current year.
The company can buy these back at a later date, either at a fixed point or when the company chooses.
Then, just to make sure things are confusing, companies can also create different classes of shares. You might hear these called alphabet shares because of how companies tend to show them in their records.
‘A’ shares might give the shareholder voting rights and a share of the profits
‘B’ shares might only give the shareholder dividends, but without any voting rights.
So, when you look at shares it’s a good idea to make sure that they do what you think they do. You can find information about what different types of shareholders are entitled to in the company’s memorandum and articles of association, and often in a shareholders’ agreement.
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Who can own shares?
Shareholders tend to be people, but in the UK, a limited company can also own shares in any other company. Other types of business structure, such as general partnerships, can also own shares in a limited company.
Why might a business want to own shares?
This isn’t that unusual, and owners with multiple businesses will sometimes create a limited company to own the shares in all their different ventures, and then they’ll own the main parent company. Other reasons might include:
Businesses that are cash-rich may choose to invest some of that cash by buying shares in other businesses purely for the income and capital growth that they would see. If you have a profitable and growing company, then it is entirely possible that you could sell shares to raise money.
A business might wish to own a company that produces complementary products so that it can use these in a combined marketing strategy.
The business may want to buy a supplier in order to reduce the cost of the supplies it needs, or to control who else has access to them (which could make life very difficult for their competitors).
It isn’t unheard of for a business to buy out competitors so they own a larger market share.
Businesses owning shares in other businesses can get very complicated, especially when it comes to accounting and tax. Always take advice!
Will I pay tax if I own shares?
If you own shares then you might receive dividend payments from the company, or you might sell the shares and get paid that way. Sadly, there’s rarely any escape from paying tax, and the income you might get from either of these is no different!
Shares and dividend tax
Individuals who receive dividends normally need to pay dividend tax. This is a different rate to income tax, and the rate you pay depends on which tax bracket your income is in. There’s also a dividend allowance so the first £1,000 of dividends (in the 2023/24 tax year) you receive is tax free.
Because dividends are a share of the profits, the total amount is divided by how many shares there are, and then multiplied by how many of those shares the shareholder owns.
Again, keep an eye on the shareholder agreement or the company’s articles of association here. If the company creates different share classes, it might pay dividends at different rates depending on what type you own, so your cut of the profits might be different to someone else’s!