Let’s consider shares from the perspective of the director of an up-and-coming company. We will cover: how to issue shares when forming a company, how to do shares or stock transfer, how to issue more shares (form SH01), and when you should go public.
A Complete Guide to Shares: Part 2
Shares represent a portion of ownership in a private company. When a new company is incorporated with Companies House it’s compulsory for one or more shares to be issued with at least one share being issued to each shareholder.
How to issue shares?
When you are completing the details to register your limited company, you will be asked to issue shares. Let’s take a look at the decisions you need to make:
How many shares should I issue on formation?
If you’re the only person involved in the business it’s possible to issue just one share, representing 100% ownership of the company. Bear in mind though that this single share cannot be subdivided. If, in the future, you wanted to sell or transfer shares to someone else the possibility of a simple share transfer is ruled out and you would have no option other than to create new shares.
One popular option is to issue 100 shares at the incorporation stage. Here each share represents 1% of the company making the calculation of ownership easy in the event that those shares are later transferred to other parties.
In other situations, the issuing of a much larger number of shares may be useful. Say for instance three of you are setting up a company and you each agree to put in £1,000 as share capital. Here the best way forward may be to issue 3000 shares, each with a nominal (or par) value of £1.
How to issue shares will depend on your particular circumstances and the plans you have for your company.
What type of shares should I issue?
Most small companies issue ordinary shares, which carry full rights to dividends as well as rights to vote at company meetings and an entitlement to capital should the company be dissolved.
So what about other classes of shares, for example, preference shares, non-voting shares or redeemable shares? If you’ve come across these in your research you’d be forgiven for thinking that the process of issuing shares was somewhat bewildering. Bear in mind that a big reason for different classes is to help companies grow and to better define the relationship between individuals and the company as new individuals come on board.
Different classes give shareholders different rights and powers.
Holders of preference shares, for instance, are entitled to get a fixed percentage of company profits through dividends in preference to other shareholders.
Non-voting ordinary shares
In contrast, non-voting ordinary shares can be used to distribute shares to other people (such as employees or family members) without having to give those individuals an automatic say in company affairs.
Redeemable shares are those issued on the terms that the company will or may buy them back at a later point in time.
Existing shares can be reclassified and new classes of shares can be created later on. Particularly where there are multiple parties involved, it is advisable to seek professional advice from an accountant on how many and what type of shares to issue. This will help you get the structure you need without it turning needlessly complex.
When is transferring shares useful and how do I do it?
We’re not talking here about the creation of new shares (we’ll come on to that next), but about the transfer of shares either for cash or as a gift, and what is the Companies House stock transfer form you need to use.
Why transfer shares?
Some of the most common scenarios include the following:
- Tax efficiency. You may wish to transfer shares to your spouse or perhaps to your children as part of a wider plan to get them more closely involved in the business.
- Restructuring of your team. You may be bringing another director on board and a transfer of shares may be an agreed part of the package.
- A change in your corporate structure. This includes the situation where your company is to become a subsidiary of another company.
Stock transfer: an outline of how it’s done
Where money is being exchanged and, depending on how much is involved, the buyer and/or the seller may wish to get a professional valuation of the company where a detailed contract may have to be signed up.
In all cases, the transaction is completed via a stock transfer form at Companies House. If the value of the transfer is more than £1,000 this form has to be sent to HMRC for stamping and the buyer has to pay Stamp Duty on the purchase (currently 0.5% rounded up to the nearest £5). You must notify Companies House of the transfer as part of your Annual Return.
Why and how to issue new shares?
Mostly, companies issue new shares when they want to raise money. Here are some real life examples:
- To transfer a stake in the company to individuals or institutions in exchange for cash. This could be to repair a damaged balanced sheet and keep the company cashflow healthy. Equally, it may be done to fund a big capital spend, such as new machinery to take the business to the next level.
- To facilitate the takeover of another business. For instance, where shares in your company are issued as payment to the owner of the target business.
- To make employees shareholders. This is where you want to make shares part of the remuneration package for staff, by making shares part of your bonus scheme for instance, or giving employees the choice of receiving part of their salary as shares.
The decision to distribute new shares has to be made by all directors through a board resolution. This ‘allotment’ is formally carried out by entering the name of the ‘allottee’ (the intended recipient of the shares) in the company’s register of members.
After allotment comes issuing the shares. This is done by issuing share certificates to the allottees within a maximum of two months of the date of the allotment. You then deliver a form, SH01, to Companies House, which basically just informs them about the transaction. You will need to update the register of members and register of allotments and then record the allotment and new share issue in your next Annual Return and Company Accounts.
Selling shares to the general public: is this a possibility?
Private companies can only sell shares to specified, intended recipients. You cannot, for example, put out an advert inviting all and sundry to buy shares as only a Public Limited Company (PLC) is permitted to offer shares for sale to the public.
‘Going public’ brings with it stricter regulation not least to ensure that public investors are protected. It requires the company to have at least two directors, a qualified company secretary and publically-issued shares with a value of at least £50,000. PLCs have the option of becoming listed companies, whereby its shares are floated on a stock exchange and traded in the way described in Part 1 of this guide.
Private to public
It may seem a long way off and by no means is it for every business, but it’s worth remembering that everyone has to start somewhere. Most PLCs started life as private companies and took the decision to go public to reach the next level in terms of financing their business.
Are you ready to incorporate to begin your journey as an entrepreneur? Find out how starting a company need not be a difficult process.