Shareholders are normally entitled to voting rights and dividend payments in proportion to the value of shares they own, but if you want more flexibility then you might decide to create different share classes.
What are shares?
Shares are units of ownership showing who owns and controls a limited company. If you own shares, then you own part of the company’s equity (or all of the equity, if you own all of its shares).
What are shareholders allowed to do?
As a shareholder you’re normally entitled to make decisions about the company (known as having voting rights) and to receive dividend payments from the company’s profits (which you’ll need to pay Dividend Tax on).
The amount of decision making power you have, or what your cut of the profits looks like, depends on how many shares you own. For instance, if there are two shareholders in the company and one owns more shares than the other, this usually means they’re entitled to more of the profits, and can make decisions without the other person’s agreement.
Usually, but not always. This is where different types of shares come in.
Can I have different types of shares?
Yes, you can. Sometimes known as alphabet shares because of the way they’re recorded in the accounts, companies often use these to give their shareholders different rights.
One type of share might entitle the shareholder to a percentage of the profits for each share they own but no voting rights, whilst another only permits voting rights and no dividends. It’s up to the company to decide what each class of shares entitles the shareholders to.
For example
The owners of a company decide to create three types of shares, and call them A, B, and C. They agree that:
- Shareholders with ‘A’ shares will have voting rights, and will receive dividends at a higher rate than B shares
- B shares also have voting rights in the company, but their dividends are worked out based on a lower rate
- C shareholders have the same rate of dividends as A shareholders, but have no voting rights at all
Different share classes in action
A very common example of using different types of shares is a company in which one shareholder is also a director and runs the business on a daily basis, whilst the other shareholder dips in as needed.
They might decide that they both need an equal say in how the company is run, but that the person taking care of the day-to-day stuff should earn more. Creating two classes of shares would allow them to keep their equal voting rights, whilst paying one shareholder their dividends at a higher rate than the other.
You might even decide to create shares for family members or staff, allowing them to receive a lower rate of dividend but without any decision-making powers, and the stipulation that they can’t transfer their shares to anyone else.
How do I create different types of alphabet shares?
Shares are created when the decision-makers in a company agree to adopt them into the company’s Articles of Association. These are the written rules which a company uses to agree how it should be run.
The process starts with a directors’ meeting to agree the different share classifications, and how to apportion them. The next stage is to notify the shareholders, and ask for their approval. If the changes are agreed you’ll need to notify Companies House within 15 days using an SH01 Return of Allotment of Shares form.
Do dividend payments all have to be the same amount?
Dividends are one of the perks of being a company shareholder. They’re a welcome financial reward in exchange for being involved in the business’ growth and development, and they can also be a tax-efficient way for directors to take money out of a business they own.
Shareholders usually receive dividend payments on the basis of how many shares they own in the company, but creating different share classes means you don’t necessarily need to pay everyone the same amount, even if they own the same number of shares.
How do I declare dividends on different classes of shares?
The process for declaring dividends doesn’t actually change, even if there are alphabet shares involved. You’ll still need to ‘hold’ a director’s meeting (yep, even if you’re the only director) and produce written minutes documenting the profits to be shared out, along with a dividend voucher confirming the amount each shareholder will receive.
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