The share capital in a private limited company is the amount of money invested by its owners in exchange for shares of ownership. Company directors are typically shareholders in their own companies. Shareholders exercise certain powers over how the company is run.
Share capital and company formation
- All companies limited by shares must have at least one share. Most small limited companies elect to have ordinary £1 shares
- Since the implementation of the Companies Act 2006, new limited companies no longer have to specify their total share capital. Instead, the new company will need to deposit an initial statement of capital, or a statement of guarantee. This can then be updated when new shares are issued.
- Existing companies still need to amend their Articles of Association if they wish to allot shares beyond the ‘authorised share capital’ ceiling stated on incorporation.
- The ‘issued share capital’ of a limited company is the total value of shares in issue. For example, a company with 1000 shares of £1 has an issued share capital of £1000.
- Shares are ‘allotted’ to members (shareholders) upon incorporation, and the company may allot shares to new members further down the line (subject to the terms of the Articles of Association, and agreement of the board).
What types of shares are there?
There are 4 main types of shares used by limited companies:
- Ordinary shares – which have no special rights or restrictions (these can be sub-divided into ordinary shares with different values).
- Preference shares – holders of this type of shares will be paid annual dividends by the company before other shareholders are paid.
- Cumulative preference shares – similar to preference shares, but allows the company to carry forward dividend payments if they cannot be made in one given years.
- Redeemable shares – these shares are issued on condition that the company has the option to buy them back after a certain period of time, or on a certain date
How do you allot or transfer shares?
- When you first form a company, you complete a Statement of Capital (Part 3 of Form IN01). This provides Companies House which details the types of share in issue, the rights associated with each class of share, information about the current shareholders, the number of shares that are ‘paid up’ or ‘unpaid’, and the currency used by the company.
- If you make changes to the share capital of a company (e.g. new shares are allotted, or the company buys back shares), you must provide an updated Statement of Capital.
- If you want to reduce the number of shares in issue, you must complete Companies House Form SH19 (section 644 and 649).
- If you want to allot new shares, you must complete Companies House Form SH01 (subject to board approval), and submit it within one month of the new allotment taking place.
- The Statement of Capital also forms part of the Annual Return Form AR01 which every company must complete each year.
- If you want to sell or transfer shares in your company, you should first consult your accountant, as there may be significant tax implications involved.
- To transfer shares, the current shareholder must complete a Stock Transfer Form, and return his/her share certificates to the company.
- The register of members should be updated with the new details, and new share certificates will be issued to the new shareholder.
- Stamp duty of 0.5% is normally payable by the buyer on the value of the purchase, and capital gains tax may be payable by the seller (again, consult your accountant for tax planning advice).
Read our guide which explains why limited companies would issue difference classes of shares.
Read the Companies House guide to share capital, which has in-depth information on issuing or changing the current classes of shares.