Lawpack

When people start up a small business, they usually form a company limited by shares. The benefit of forming such a company is that the shareholders have limited liability, which means that if the company fails, creditors cannot seize their personal assets.

But what are shares? How do you go about issuing them? And what are share certificates? How do you make a stock transfer? Here is our guide to all you need to know about issuing shares in your business.

Why should I be issuing shares?

When you sell shares in your company, it’s a good way of raising long-term finance for your business, and you don’t have to repay the finance or pay interest on the investment as you would with an overdraft or bank loan.

An individual who buys shares in your company will become one of the owners of the company. Shareholders choose who runs a company and are involved in making key decisions about the running of the business.

People who run small businesses usually give out shares in their company in return for a lump sum investment. This may either be from friends and family, or from outside investors looking for a high yield.

How do you go about issuing shares?

When you first set up your company, whether it’s an unlimited or limited company, you can decide on the level of share capital – the company’s authorised capital – and its division into fixed priced shares.

To do this, you draw up a Memorandum of Association, which outlines the amount of share capital the company will have and the division of the share capital.

The founders of the company (e.g. you and your investors) must the sign the Memorandum of Association and state the number of issuing shares. These are then issued upon incorporation (i.e. forming the company legally). The money paid for the shares – which can be a nominal value of £1 or more – must be held by the company.

To provide shares to your investors, why not purchase our Share Certificate Form, or you can find two copies of share certificates, plus all the guidance you need on how to issue share certificates, in our Limited Company Kit.

But what is ‘issued capital’?

Your company doesn’t have to issue all of its capital at once. Issued capital is the nominal – rather than actual – value of the part of the authorised share capital which has been issued to the shareholders.

A company with an authorised capital of 1,000 shares at £1, for example, which issues 500 shares, has an issued share capital of £500.

If there are any unissued shares, the directors can issue shares later, as long as they abide with the rules outlined in the Articles of Association. This usually occurs through an ordinary resolution. The company sets the price of these shares. You must let Companies House know if you issue new shares.

Do I need to issue share certificates?

You must provide your shareholders with a title document to their shares, so you do need to issue share certificates to them.

Each certificate must include the following information:

• A share certificate number
• The number of issuing shares
• The company’s name
• The shareholder’s name
• The shareholder’s address
• The type of issuing shares
• The shares’ nominal value
• A statement of the extent to which the shares are paid up

Issue share certificates now with our Share Certificate Form, available for immediate download, or get two in our Limited Company Kit.

What are the types of shares?

There are four types of shares a company can issue:

1. Ordinary shares. These shares don’t have any special rights or restrictions. They can possibly give the highest financial gains, but they are the most risky. If the company is wound up, ordinary shareholders will be paid last.
2. Preference shares. A preference shareholder gets preferential treatment when the annual dividends are distributed to shareholders. These shares have a fixed value, so the shareholder won’t benefit if the company increases its profits, but they will usually receive their dividend ahead of ordinary shareholders if the company is in trouble.
3. Cumulative preference shares. A cumulative preference shareholder’s dividend will be carried forward to successive years, if they cannot be paid one year. The shareholders will be paid, whatever the earning levels of the business.
4. Redeemable shares. The company can buy these shares back at a later date, either at a fixed date or at the choice of the business. A company cannot issue only redeemable shares.

How do I make a stock transfer?

If you run a limited company, you can transfer shares through brokers using the Stock Exchange CREST network service. If it’s a private or unlimited company, you can usually make a stock transfer by private agreement between the vendor and buyer, subject to the company’s rules and the directors’ approval. If you want to make a stock transfer, our Stock Transfer Form can help. It’s an easy-to-use document, which can be downloaded immediately from our site, and is approved by legal experts.

You do have to pay tax when you sell or make a stock transfer. You normally pay stamp duty, and any gains you’ve made through selling shares can be liable for Capital Gains Tax.

Limited companies are among the two most popular types of company chosen by UK business people, with the sole trader route the other main avenue.

The first step for anyone setting up a limited company is to register it with Companies House, which oversees the registry of companies.

Company registration matters are enshrined in the Companies Act 2006, with Companies House an executive agency of the Department for Business, Innovation and Skills.

Currently, there are more than two million limited companies registered in Great Britain, with over 300,000 new firms incorporated every year.

Under the Companies Act 2006, each limited company must have at least one director. However, having a company secretary is no longer mandatory.

Business owners are often unsure about which entity to trade as – sole trade, partnership or limited company.

There is no legal obligation for companies to trade using a particular entity, but there are differences between them. Here we outline the pros and cons of limited company incorporation.

What are the advantages of forming a limited company?

Status

The term ‘limited’ gives the company a bit more weight so it appears to hold more esteem and seems bigger, both for potential investors and consumers.

Investors

Investors are more inclined to take a chance on limited companies as their investment has more protection than a sole trader or partnership.

Under a limited company, the investor’s liabilities are also limited to their shareholding, thus giving them more security than other companies offer.

Security

As such, banks also tend to favour limited companies and they are given the chance to take out extra security by lodging a ‘floating charge’ over the company’s assets.

That means that if the terms and conditions of the loan are breached, the bank has the first claim on the assets.

Shares

Provided there are no unusual clauses in the shareholder’s agreement or company’s articles, transferring shares in a limited company is generally easier and more straight-forward than it would be in a partnership or sole trader.

Dividends

The dividends of a limited company are not subject to national insurance and are at a lower rate of tax than self-employment income.

Effective tax rates

If you intend retaining some of the profits within the business, then it might be best to go limited as this reduces the tax rate.

Despite these positives, there a number of cons to keep in mind.

What are the disadvantages of forming a limited company?

Liability

Banks will still require personal guarantees from the directors, which means that the directors can still be liable for the company’s debt.

Administration

Directors are also expected to deliver statutory documents to Companies House, so anyone failing to do this is subject to late filing penalties and could be deemed to have carried out a criminal offence.

Less privacy

Becoming a limited company means accounts and other details are held on public records so anyone, including competitors, can access company information, although it can be restricted.

Withdrawals

Making withdrawals from the company can also pose a problem in terms of tax as it is difficult for shareholders and directors to separate their finances from those of the business.

Accountancy fees

One expense bound to be higher for limited companies is the accountancy fee as reporting requirements tend to be bigger.

With all this in mind, it is worth remembering that limited company incorporation can be a profitable prospect, so why not read Lawpack’s practical guide on How to Run a Limited Company?

Written by HM Williams Chartered Accountants, this detailed guide is packed full of information and expert advice on the legal duties and formalities that must be followed when incorporating a company.

Throughout the educational process, lecturers and teachers often argue that you should begin an essay with the conclusion.

Not only does this give the audience a way into your argument, but it helps to inform their expectations of what you intend to achieve.

Most importantly, it should be so inspiring that the reader could not possibly consider putting it down, for which the same can be said of an exceptionally-well researched and written business plan.

Here are our top tips on what you should include in a winning business plan:

1. Get a good start

Open with an executive summary, which as the names suggests, is an overview of the business plan. This should invite investors to continue reading your ideas.

2. Outline your wares

Once you have attracted their attention, it’s vital that you address key issues so the investor knows the kinds of risk they face by putting their money into the business.

Explain what products or services you intend offering and quickly identify your market to prove there is a viable business opportunity at hand.

3. Do market research

Some market research could really be useful here as this will enable you to serve up some winning facts and figures your investors cannot ignore.

Within this research, reveal the size of the market, the extent to which it is due to grow and how you plan to penetrate it.

4. Online or retail?

Tell your investor how you will offer your products or services, such as whether they can be ordered online, via the phone or in-store.

5. The competition

Caribbean-American poet Audre Lorde once famously said “there are no new ideas” and this is as true in the business landscape as it is in literature.

That is why it’s vital that you prove to your investors that you are well aware of the competition you face, but do illustrate the innovative ways you might rival these competitors.

6. Check your grammar

Similar to essay writing, the business plan will be received with critical eyes, so as well as ensuring that it’s written in a professional and engaging tone, it’s also important to ensure that the spelling and grammar is correct.

While this might seem less important to you than projecting that your start-up will be earning millions within its first year, the likelihood is that investors will see such errors as a reflection of you.

7. Do SWOT analysis

Base your business plan on SWOT analysis, which simply stands for strengths, weaknesses, opportunities and threats.

This short acronym is arguably the most important guide to follow when drawing up a business plan as it briefly reminds you of all the information you need to include.

8. Create deadlines

You need to give your investors a clear time frame on when you believe your business will be in full swing, and at this point it’s worth presenting estimates of the costs you expect to face, as well as the profits you hope to enjoy.

9. Create a cash flow forecast

Parallel to this is a strong cash flow forecast, which will detail how quickly you expect to receive money against how much you will need to spend to keep the business going.

10. Funding

Don’t forget to tell investors exactly how you intend to fund your business, what you might do to overcome unforeseen problems and whether or not you will be hiring staff, and if so, from where and how many.

Both a cash flow forecast template and a business plan template are included in Lawpack’s Limited Company Formation Kit.

A sample business plan is also available in Lawpack’s expert guide How to Run a Limited Company.

A limited company consists of one or more shareholders who own shares. When a limited company is formed, it issues shares to its shareholders.

How are company shares paid for?

Company shares are paid for with money, property or services.

What is ‘issued share capital’?

If, for example, shareholders applied for two shares and these were issued, you would say that the limited company had an issued share capital of £2.

Can the limited company accept cash for shares?

If limited company shares are to be allotted for cash, there are statutory rules governing the manner and timing of such an offer. These limited company rules state that company shares must be offered to existing shareholders, in proportion to their shareholdings.

If you, as company director of a limited company, want to exclude these rules (e.g. if you want to offer shares to a new shareholder) you should take legal advice.

Can company shares be issued at a higher price?

A limited company can issue shares at a price greater than their nominal value to bring more money into the limited company, while protecting the voting rights of existing shareholders and avoiding the procedures required to increase the authorised share capital of the company.

For example, £1 shares could be sold for £10 with the difference between the actual and nominal value of each company share (£10 – £1 = £9) being held in a separate account, known as a ‘share premium account’.

Remember that no private company is allowed to issue or cause to be issued any advertisement offering shares for sale to the public.

Are the limited company’s shareholders entitled to dividends?

Shareholders are entitled to any dividends declared by the limited company, plus a proportion of the limited company’s assets on dissolution.

How are the limited company’s shares paid for?

Company shares may be paid for, nil paid (unpaid) or partly paid for on issue.

If the company shares are partly paid for or nil paid, the limited company will be entitled to ask for the balance owed on each share and the shareholder must pay it.

What happens once the shares have been issued?

You must send Form SH01 (available to download when you purchase Lawpack’s Limited Company Formation Kit) to Companies House.

What happens if the shareholders want to sell or give away their shares?

Shareholders may only transfer their stock in accordance with the Articles of Association. The limited company is obliged to offer the shares being transferred to the existing shareholders.

What if the company fails to find a purchaser for the shares?

If the company fails to find a purchaser among the existing shareholders within 28 days, it’s usual for the selling shareholder to be free to sell his/her shares to outsiders (subject always to the limited company directors’ power to refuse to register a transfer of shares).

Does the stock transfer need to be registered?

When shares are transferred, a share transfer form must be completed and either stamped with the necessary stamp duty or, if the transfer falls within one of the exempt categories, the necessary certificate claiming exemption from stamp duty has been completed.

The limited company directors should approve the registration of any stock transfer.