Share Capital Explained

All private limited companies in the UK that are limited by shares are obliged to maintain a share capital of at least one share. Companies that are limited or Ltd are officially referred to as a "private company limited by shares", and they are businesses which are formed for the purpose of making a profit.

The following article explains share capital more thoroughly, including different types of share capital, effects of currency matters and the role and eligibility of shareholders.

Authorised Share Capital

The share capital of a company in the UK is established at the time that this business is incorporated. New directors of a firm are required to decide which type of shares they want to create, and this becomes referred to as the class of share. The directors will also determine the face value of each share. Usually, a new company starts by using ordinary share values of £1 each.

Previously, a company was required to decide the total authorised share capital that they wanted to create. This necessity changed with the Companies Act 2006, and now a company is only required to issue the number of shares that they need at the incorporation time. They are then entitled to issue a further and uncapped amount in the future, as long as they observe any imposed restrictions set out by the Articles of Association for their firm.

Issued Share Capital

Issued share capital refers to the number of shares that a company currently has in issue or the number of shares that are currently held by shareholders of the firm. For the majority of new businesses, only a small number of shares will need to be issued, as this will determine who owns what percentage of the company. The shareholding will also determine the profit share that each person is entitled to.

It is not necessary for issued share capital to represent the exact real capital investment that a person wants to make into their new business. That is to say that if someone wants to invest £5,000 into a new business, they are not required to issue themselves with £5,000 worth of shares. They are entitled to issue themselves with just a single £1 share. At such a time that the business becomes profitable, the business starter may then be able to repay themselves the initial investment as a repaid loan from the business. In many situations, this is a more tax efficient way to manage start up investments and shareholding and advice should be sought from an accountant to secure the most beneficial plan.

Share Class Types and Currency

There are a number of different kinds of shares that a company can issue and the company can choose to include different terms to the share classes that they use. The terms that are imposed on shares are set out in the initial structure of the company's share capital plan. The following share types are the most common:

Ordinary Shares

Ordinary shares have no special restrictions or rights and can be divided into classes with different values. They are particularly straightforward types of shares. This type of share is the most common as it is a simple share and normally offers the shareholder the right to vote and the right to dividend entitlement if they are paid by the business.

Preference Shares

Preference shares usually hold a right that assures that any annual dividends will be paid on these shares before other classes.

Cumulative Preference Shares

Cumulative Preference shares benefit from a right that if dividends cannot be paid one year, they will be carried forward to future years.

Redeemable Shares

Redeemable shares are issued under the acceptance from the business that they will buy them back after a set period or on a specified date if the company or shareholder requires. It is not possible for a business to only have redeemable shares.

Currencies

The majority of new UK businesses choose their share capital in pounds sterling, but it is possible for new companies to be formed with the share capital in other currencies. Some businesses are set up with multiple classes in different currencies.

Shareholders' Roles and Benefits

A company's shareholders are its owners any they are sometimes known as members or subscribers. The shareholders have the responsibility of appointing the directors, who are employed to manage the company on their behalf. In many new small businesses, the shareholders are also the directors, but this is not a legal requirement.

To comply with anti-money laundering laws, shareholders who own more than 20% of a company will usually need to be identified to the companies bankers.

Who can be a shareholder?

A shareholder can be any person, and there are no geographical restrictions in pace, meaning UK companies can have shareholders who live in other countries. Directors of a company are not legally required to be shareholders.