When you’re setting up a limited company through Companies House (or through our Company Formations service for just £10), you’ll be confronted by a rather scary-looking question regarding shares and how much value is attributed to each of them.
Don’t worry, it’s not as confusing as it seems.
Understandably, you may not have taken this into consideration at this early stage in your business, but it’s an unavoidable part of the incorporation process, so, here’s what this all means in plain English.
What are shareholders?
Shareholders are the people who collectively own your company. You don’t have to be a director of the company to be a shareholder.
Each shareholder has an official say on major corporate decisions relating to the company; also known as voting rights. The person with the most shares has the most voting rights (this is sometimes referred to as having ‘controlling interest’).
At the discretion of the company directors, dividends (payments from the company’s profits after tax) can be issued to shareholders in accordance with how many shares they/knowledge-tax/what-tax-do-i-pay-on-dividends/ hold.
What are shares?
Shares define how the ownership of your company is divided up. Every limited company must have at least one share.
For example, if a company has one share and is owned by one person - that person owns 100% of the company.
However, if a company has 2 shares, and two people own a share each, then they both have 50% ownership of the company, and so forth.
All shares have a nominal value which normally need to be paid into the company bank account by the end of the company financial year. For example, it's standard practice for a new small company to have 100 £1 shares when they incorporate the business. This means £100 needs to be paid into the company bank account by its shareholders. Should your company grow or another director come on board you can always issue more shares at a later date! So, while it might be tempting to create 10,000 shares worth £1, this will mean £10,000 must be paid to your company after twelve months.
What is share value?
Share value is how much each share is worth - i.e. the amount the shareholder has invested. This is different from the nominal value of the shares. When a company is formed normally the company has no value apart of the nominal value of the shares. As the business starts to trade, the share will increase in value.
How much should I value each share in my company at?
If you’re the sole director of a new company, then the easiest thing to do is create hundred shares at the value of £1. This will give you 100% of the company with a share capital of £100. We’d generally recommend this when starting out as it keeps things nice and simple.
Similarly, if there are two directors then you can issue 50 shares to each shareholder at the value of £1 each. This will give both of you 50% of the company with a share capital of £50 each.
If you want an uneven divide of the company (i.e one director owns more of the company than the other) you can split the 100 shares further. - for example you could divide the 10 shares so that one director has six shares (60%) whilst the other has four shares (40%).
There’s no such thing as half a share, so if you want an even more specific division of the company, then you can always have more than 100 shares at £1 each and then divide them accordingly.
Of course, you can always issue more shares later when you need to. However there are tax and accounting implications to this, so please consult an expert.
What is share capital?
Share capital is the total value of shares that have been issued.
For example if you issued four shares at £1 each, the share capital of the company would be £4.
What are Share classes?
Share classes are typically used if company owners want to assign different rights to different groups of shareholders. For example, a company’s founders may issue themselves class A shares, which give them enhanced voting rights, while selling class B shares to investors. This allows them to remain in control of their company even if they sell the majority of their limited company to a third party.
Typically share classes are not required for new limited companies, and we do not offer the facility to define share classes when incorporating. However, different share classes can be formed subsequent to incorporation should they be required. This can complicate your accounting and dividend issuing, so for new limited companies with only one director, we do not usually recommend multiple share classes.
Still unsure about shares?
For more on the subject, we have an article on what shareholders' agreements are, and why you need one.
If you'd like to speak to someone, one of our advisors will be happy to explain shares further. Give us a call on the number at the top of this page, or email email@example.com and we’ll get back to you as soon as we can.
The way you structure a business can be very complex and therefore might need bespoke legal and tax advice. Please note Crunch can only offer support to simple companies with basic structures and we don’t advise on any legal work that might need to be done alongside a company restructure or company formation.