A Handbook For Sharing Capital While Conducting Business in the UK

If you plan to establish your business as a limited liability company in the UK or have already done so, you need to be aware of how share capital works there. This is so that owners of shares can exercise certain rights, and because there are rules that must be followed if you want to change your share capital, such as to obtain venture capital. Shares also come with certain rights that are provided to their owners.

As an added bonus, you may use share capital to your organization's advantage by creating different share classes to draw in investors and inspire employees. Discover how share capital works in detail and how your firm can profit from effective management.

Source: https://bbcincorp.com/offshore/articles/uk-share-capital

Explaining share capital

Share capital is the funding given by a limited company's shareholders in exchange for a portion of the company. As a result, share capital is the sum of all investments made in the company, or the nominal worth of all issued shares.

Many limited firms choose to issue 100 shares at a price of £1 apiece when they first start out because doing so makes it easy to see who has what (each share is one per cent of the business). In the UK, many sorts of shares, including ordinary shares, preference shares, and redeemable shares, are also frequently given.

Common stocks

These shares are held by the vast majority of shareholders and are not governed by any particular conditions or privileges. Ordinary shareholders have voting privileges, but if the company is ever liquidated, they will get distributions last of all shareholders.

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They do not have voting privileges, but they do receive dividend payments ahead of regular shareholders. The dividend is given annually and is predetermined, thus the amount is not in any way influenced by the company's overall performance.

Unredeemable shares

Through this, the company is given the option to eventually buy back shares. The time will either be set in advance or left up to the business to decide. It is not possible for a company to only issue redeemable shares because a corporation must also issue non-redeemable shares.

Share capital's advantages and disadvantages

Pros

Taking into account the advantages of share capital could help you find a solution if you have a limited budget but want to find a way to expand your company.

One benefit of raising money through the selling of shares is that there are no requirements for original investment repayment or interest payments.

The business also has complete discretion over how to use any proceeds from the sale of shares. Unconditional and unrestricted funding is offered. Contrarily, a creditor has the authority to impose limitations on the company's use of the funds they lent it.

An investor will pledge their support for the venture after they have joined. Because of this, your firm will benefit from their knowledge and experience and share their desire to see the industry flourish.

A very adaptable means of raising money is the sale of shares. The quantity of shares to be issued, their initial price, and the date of distribution are all entirely within the discretion of the Company.

Additionally, it may issue more shares if it plans to raise money in the future. The corporation can also choose the kind of shares it issues and the privileges they grant owners. The company may also decide to buyback any issued shares.

The likelihood that the business will fail has also been significantly decreased. Shareholders are not entitled to drive a corporation into bankruptcy if it is unable to make payments.

Cons

Even while share capital could be a useful tool for your business, there are a few other factors you should keep in mind. By transferring ownership of your firm to investors when you sell shares, you are essentially giving up some of your influence over it.

This is due to the fact that your investors now own a share of your business. As a result, you should be cautious when deciding how much of your business to sell, especially since investors will be able to cast votes on matters like commercial transactions, corporate strategy, and how the business is handled.

You will lose control over the direction that your firm is going and you might not be able to take advantage of crucial opportunities if you have given away too much and investors decide not to support your aims. In fact, if they have a majority, you run the risk of having your leadership of your own business taken away from you and replaced by someone else.

The fact that investors expect a better rate of return on their investments should also be kept in mind. This is primarily because they now face a higher degree of risk in the event that your business files for bankruptcy. As a result, your company's stock is frequently given to investors at a discounted price, allowing them to recoup some of their initial investment. Additionally, any dividends that you have already paid out to shareholders are not deductible.

Share dilution does, however, have a benefit. Each shareholder will have 1% of the company's shares, for example, if 100 shares are allocated to 100 shareholders.

When capital is urgently needed, another 100 shares may be issued to raise the overall number of shares to 200, but each Shareholder's stake is then decreased to 0.5%. This may first seem undesirable, but when the business has successfully made a capital request, cash for business expansion will be accessible. It indicates that the stock's value rises.

How to control dilution of equity?

When a corporation issues new shares, it dillutes the ownership position of current shareholders. This may occur if a business seeks funding from investors or launches a share buyback program.

Equity dilution can be managed in a number of ways, such as share capitalization, share repurchase programs, and share dilution limitations.

In order to issue new shares without raising the number of outstanding shares, share capitalization is used. This can be accomplished by establishing a new class of shares with distinct dividend and voting rights, such as preference shares.

Companies are able to buy back their own shares through share repurchase programs, which lowers the total number of outstanding shares and reduces the ownership interest of the remaining shareholders.

To limit the issuing of new shares or the repurchase of existing shares, share dilution limits may be implemented. These restrictions may be established in the articles of association for the corporation or by general meetings of shareholders.

You can safeguard the interests of your existing shareholders by adopting measures to manage equity dilution.

What are nominal share values and how are they determined?

The term "nominal value of shares" refers to the lowest price that has been established for a certain class of shares that have been issued by the corporation. This amount can be determined by dividing the total paid-up share capital of the company by the total number of shares that are issued at any particular time. There must be a defined nominal value per share for each class of shares (for instance, one pound).

The most a shareholder is required to contribute to the company, even if it goes bankrupt, is the amount they initially put in (being the nominal value of their shares). The market value of the shares, which might be significantly higher than the nominal value, differs from the value that is listed on the share certificates.

Your share capital may be adjusted

The majority of the time, shareholders are not allowed to ask for the return of their share capital because it is the company's property and not theirs individually under the law. Keeping the corporation's share capital up to date is thus the directors' duty.

Various methods can be used, depending on the circumstance, to alter a company's share capital. We strongly advise you to seek the aid of a specialist due to the potential intricacy of this process.

There are several main ways to change your share capital, which are listed below:

How would it work if you wanted to increase your share capital?

During the course of a UK limited company's existence, the share capital may be increased at any time by the shareholders. Applications for modifications are accepted by Companies House either online or in the mail.

In the case that an increase in a company's share capital occurs, the completion of Company House's Form SH01 is necessary. Either the paper copy.

If there has been an increase in the share capital of a company, Company House Form SH01 must be completed. The submission of this form may be made using either the paper version of Form SH01 or the online web filing service made available by Companies House. The online option is probably the easier to finish out of the two options.

Consider lowering the value of your shares

When a company decreases the amount of its share capital, it engages in capital reduction.

A UK company may lower its share capital in a number of ways. For instance, a private firm may do so through a shareholder resolution that is approved by a court or through a declaration of solvency that is signed by all directors.

Despite the variety of ways to reduce share capital, the final results almost always involve paying back the company's shareholder in cash. If you hate dealing with complicated paperwork, this process can be difficult for you. Contact us right away to schedule a thorough consultation with an expert; it's never too late.

Filling out the statement form (SH19) for capital reduction provided by the UK government will also give you a good start.

Why should you create a limited liability company?

There are several benefits to creating a company limited by shares, which is the same as incorporating a firm, including the following:

• In the event of a firm's bankruptcy, you won't be held personally liable for the obligations of that company (unless you have provided a guarantee to a bank or have mishandled the business).
• To guarantee that your business and personal taxes are handled separately.
• Instead of getting a loan to finance your company, you might think about issuing shares.
• This will make selling your business much simpler.
• Therefore, you can encourage investment by taking advantage of investment plans that are created for expanding businesses, or you can give staff shares as a perk.
• Limited liability partnerships, in addition to private limited businesses, can pool money via a partnership agreement.

What is issued capital, and how do I determine how many shares will be issued?

The shares are regarded as having been issued when a shareholder's name appears in the corporate register of members. As a result, you must update the company's member record as soon as possible if you distribute new shares to either current shareholders or new owners.

It is up to the proprietor of a small business to decide how many shares to issue; there are no set rules in this regard. If you're a sole owner and you decide to incorporate your firm, you can decide to own just one share of the corporation.

Because owning stock in a corporation gives the owner the power to run that company, it is essential to know the percentage of a company's stock that each shareholder owns. For instance, a shareholder who owns just one share of a company is deemed to own the entire business. Each shareholder will own fifty percent of the company if there are two shares issued with an equal value and they are each owned by a different person.

With "ordinary" shares, which have an equal right to vote and receive dividends from the firm, the vast majority of enterprises begin. Additionally, you have the choice of issuing a variety of share classes, each of which grants its owners a distinct set of rights, such as a different set of voting rights, a different set of profit-sharing rights, and a different set of rights in the event that the company is liquidated (wound up).