Shares and shareholders

Selling shares in your company is one way of raising long-term finance for your business. This is also known as equity finance. The advantage of equity finance is that you don’t always have to repay the finance or pay interest, as you would with an overdraft or bank loan.

Shares in a company represent ownership. When an individual buys shares in a company, they become one of the owners of the business. This entitles them to a share of the distributable profits of the company – the dividends.

This guide will explain how shares are issued and sold, what dividends are and the tax implications associated with dividends.

---

What are shares and why are they issued?

Shares represent ownership of a company. When an individual buys shares in your company, they become one of its owners. Shareholders choose who runs a company and are involved in making key decisions, such as whether a business should be sold.

While shares are most obviously associated with the stock market, most small businesses don’t go near a stock market in their lifetime. They are more likely to issue shares in their company in return for a lump sum investment. This investment may either come from friends and family or, for businesses that are looking for capital to fund high growth, through formal equity funding finance.

Formal equity finance is available through:

• business angel investors
• venture capital firms
• stock markets

These investors are willing to put up capital for a share in a growth business. The advantage of raising money in this way is that you don’t have to pay the money back or pay interest to the investors. Instead, shareholders are entitled to a share of the distributable profits of the company, known as dividends.

Issuing shares in your company on a stock market can provide:

• new finance
• an exit for founding investors who want to realise their investment
• a mechanism for investors to trade shares
• a market valuation for the company
• an incentive for staff using shares or share options
• an acquisition currency in the form of shares
• a way to raise your business’ profile

For more information on business angels and venture capital firms, see our guide on equity finance.

---

How are shares issued?

When you set up a company with share capital, you can decide on the level of share capital and its division into fixed priced shares.

A statement of capital and initial shareholdings must be delivered to Companies House on form IN01 on incorporation of the company.

This will set out:

• the amount of share capital the company will have
• the division of the share capital

The founders of the company must sign form IN01 and the memorandum of association and state the number of shares they want. These are then issued upon incorporation. Find form IN01 on the Companies House website – Opens in a new window.

Family or friends

You may choose to issue shares to family or friends in return for investment in your business, rather than accepting the offer of a loan from them. That way you’re not obliged to make repayments. It is important to formalise any agreement with family members or friends as this can help you avoid or resolve any disputes that may arise in future. For more information see our guide on financing from friends and family.

Employees

Employee share ownership schemes offer employees a stake in the business, encouraging loyalty and helping you to retain key staff. They also provide an incentive or reward for performance and can help recruitment. See our guide on how to set up employee share schemes.

Issued capital

A company need not issue all its capital at once. Issued capital is the nominal – rather than actual – value of the part of the share capital that has been issued to shareholders.

For example, a company that issues 500 shares at £1 each has an issued share capital of £500.

Public limited companies (plcs) must have at least £50,000 worth of issued share capital before they are allowed to trade. Initially they must satisfy this requirement by means of shares in sterling or in euro shares (and not by a combination of the two).

Once a plc has started to trade, the requirement can be satisfied by means of share capital denominated in multiple currencies (including currencies other than sterling or euros). Every share issued by a plc must be paid up at least as to a quarter of its nominal value – plus the whole of any premium from issuing the shares at a higher price.

Further shares can be issued in the company by the directors, subject to the rules set out in the Articles of Association, but typically by being authorised to do so by ordinary resolution of the company’s existing members. An exception to this is that the directors of a private company incorporated under the Companies Act 2006, which will only have one class of shares, do not need any prior authorisation from the company to allot shares. The directors set the price of these shares.

Limited companies must notify Companies House of any new shares issued. Download form SH01 to inform Companies House of newly allotted shares from the Companies House website (PDF, 381K) – Opens in a new window.

---

Types of shares

A company may have many different types of shares that come with different conditions and rights.

There are four main types of shares:

• Ordinary shares are standard shares with no special rights or restrictions. They have the potential to give the highest financial gains, but also have the highest risk. Ordinary shareholders are the last to be paid if the company is wound up.
• Preference shares typically carry a right that gives the holder preferential treatment when annual dividends are distributed to shareholders. Shares in this category receive a fixed dividend, which means that a shareholder would not benefit from an increase in the business’ profits. However, usually they have rights to their dividend ahead of ordinary shareholders if the business is in trouble. Also, where a business is wound up, they are likely to be repaid the par or nominal value of shares ahead of ordinary shareholders.
• Cumulative preference shares give holders the right that, if a dividend cannot be paid one year, it will be carried forward to successive years. Dividends on cumulative preference shares must be paid, despite the earning levels of the business, provided the company has distributable profits.
• Redeemable shares come with an agreement that the company can buy them back at a future date – this can be at a fixed date or at the choice of the business. A company cannot issue only redeemable shares.

You can find Companies Act 2006 guidance on the Companies House website – Opens in a new window.

For information on how you can use these shares as an employee incentive, see our guide on how to set up employee share schemes.

---

Sale and transfer of shares

Share dealing is a complex area and specialist advice should be sought from solicitors, accountants and company law agencies.

Transfer and transmission of shares

Shares in a listed company are transferred through brokers using the Stock Exchange Euroclear service. However, in a private or unlimited company, shares are usually transferred by private agreement between the seller and buyer, subject to the company’s rules and approval of the directors.

Certain taxes apply when you transfer or sell shares:

• If you are transferring shares yourself using a paper stock transfer form Stamp Duty may be payable when the value is over certain limits. See our guide on Stamp Duty on shares.
• Stamp Duty reserve tax is normally payable when you transfer shares through a broker using the Euroclear service. Find Companies Act 2006 guidance on the Companies House website – Opens in a new window and see our section on Stamp Duty.
• Any gains you have made on selling shares may be subject to Capital Gains Tax. Find out about Capital Gains Tax and shares on the HM Revenue & Customs (HMRC) website – Opens in a new window.

When a shareholder dies or becomes bankrupt, their shares and the rights associated with them must be given to a personal representative or executor.

Issuing a prospectus

If you want to list your company on the Stock Exchange, or offer unlisted securities to the public, you need to publish a prospectus or listing particulars. Only a public limited company can do this.

The prospectus has three main functions:

• setting out all the information that you must make public under the Listing Rules
• acting as a marketing tool for shares in your company by describing the business and its prospects
• setting out the price of your company’s shares and how much capital you hope to raise

The UK Listing Authority, part of the Financial Services Authority, must approve the prospectus.

Download a practical guide to listing from the London Stock Exchange (LSE) website (PDF, 1.97MB) – Opens in a new window.

---

Paying dividends and paying tax

At the end of a calendar year, a company’s board decides whether the business has done well enough to pay shareholders a dividend. A dividend is a part of the company’s profits that is given to shareholders. In larger companies, it is common for an interim dividend to be paid at the half-year point. The dividend is calculated per share, so the more shares you own, the more money you get. Dividends attract income tax, but not National Insurance charges.

Many company share schemes allow employee shareholders to reinvest dividends in further shares called dividend shares. A maximum of £1,500 in dividends can be reinvested in this way each year. If an employee holds these shares for three years, they pay no income tax on them. If not, the dividend used to pay for the shares becomes taxable.

Read more about tax on savings and investments on the HM Revenue & Customs (HMRC) website – Opens in a new window.

When paying dividends, the company must send a dividend voucher to the shareholder by post. This shows the amount of the dividend and the amount of tax credit. The tax credit indicates the amount of tax paid by the company on the shareholder’s behalf. Dividends are paid after tax has been deducted at the basic rate. If you pay a higher rate of tax, you may be liable to pay additional tax on your dividend.

Companies can pay dividends electronically if a shareholder agrees to it. Companies no longer need to send a dividend voucher in such cases.

---

Making changes to share capital

Companies can alter their share capital through a number of routes. You should consult your accountant or legal adviser to find the best route for you.

Since 1 October 2008 private companies have been able to reduce share capital by means of a special resolution and a statement by the directors confirming the solvency of the company. The procedure is subject to any provision in the company’s articles prohibiting or restricting the reduction of capital.

To notify Companies House of a reduction of capital, you must complete Companies House form SH19 section 644 and 649 – Statement of Capital. You can find form SH19 section 644 and 649 on the Companies House website – Opens in a new window.

There is a fee to register a reduction in share capital. The fee varies depending on whether or not you want to register the change on the same day that you submit the documentation. The fee should be attached to the SH19 form.

All current fees are given on the relevant forms to be sent to Companies House.

Issuing shares to a new shareholder

A company can issue shares to a new shareholder by authorising the directors to allot shares. The authority can be in the articles or given by an ordinary or elective resolution. Allotment creates a right to be issued with the shares. Companies House form SH01 must be completed and returned within a month of the allotment of new shares.

You can download form SH01 from the Companies House website (PDF, 381K) – Opens in a new window – or you can complete form SH01 online when you register with the Companies House WebFiling service. Enrol for WebFiling with Companies House.

Changing the shares

A company can consolidate or subdivide its share capital if authorised to do so by the articles. Consolidation is when the shares are put together and then divided into shares of larger amounts, eg 200 shares of £1 are consolidated to create 100 shares of £2. Subdivision is when shares are divided into smaller amounts.

To consolidate or subdivide shares, a company must pass an ordinary resolution, then send the resolution and a completed form SH02 to Companies House within a month of the change.

---

CASE STUDY

Here’s how I managed the shareholders in my business

Silverbear Ltd is a fast-growing software business based in Guildford. The company provides customer relationship management solutions and systems integration for commercial and local government clients. Managing director Mark Travis explains how the company manages its relationship with its shareholders, which include the majority of Silverbear’s 18 employees.

What I did

Set objectives

“It’s really important to decide what you, as business owners, want from a share issue before getting into the technical and legal issues. My co-founder and I were clear that we wanted to retain a majority shareholding and also keep control of decision-making. We also wanted to set up an employee share option scheme to provide an incentive for staff.”

Get advice

“Issuing shares can be complex, so you do need external advice. There are statutory requirements, tax implications, dividend payments and your objectives as owners to take into account. You also have to decide upfront on the value of the shares and the level of equity capital to be issued.

“We employed the services of an accountant and a solicitor to help us. Even so, you have to be prepared to devote time to the process and the considerable paperwork involved.”

Manage expectations

“To achieve our objectives we decided that we’d retain ‘A’ shares, or voting shares and that the new shares would be ‘B’ shares, or non-voting shares. We recognised that this could be a source of dissatisfaction, so we took great care to explain to shareholders the business reasons behind this approach.

“It’s tempting to make projections about how much shares may be worth in future if the business performs well, particularly when asked by shareholders. We’ve always resisted this, since we feel that it could raise expectations unfairly.”

Communicate openly

“It’s vital to treat all shareholders as stakeholders in the business and communicate with them accordingly. We hold quarterly meetings where we give a presentation on company performance, including cashflow, contract wins, sales projections, new product development and all other relevant matters.

“Our motto for meetings is ‘no surprises’. We make sure that any big issues have been disseminated in advance, so shareholders arrive at meetings informed and prepared. Overall, we strive to communicate the reality as opposed to our vision. We want to build credibility with shareholders, rather than risk disappointing them by making ambitious promises followed by below-par results.”

What I’d do differently

Pick experienced advisers

“We made the mistake of using an accountant who hadn’t actually been through the process before. It would have been easier if we’d used someone with a proven track record.”

Think carefully about share structure

“Whilst having different shares has worked well, if we had our time again I think we’d keep things simpler, since it’s made the administration harder to manage.”

---