Standard limited companies, known as ‘Limited’ or ‘Ltd.’ companies are more properly called Private Companies Limited by Shares. The limited by shares bit means that the company is liable for debts up to the value of its shareholdings. So if a company has shares worth £100 it is liable for debts up to £100, if it has shares worth £1000 it is liable for debts up to £1000.
In practice the assets of a company (the things it owns such as buildings, vehicles, and computers) will be used to pay off any debts the company has if it goes under. But legally individual shareholders could be asked to stump up their £100 or £1000 so it is worth considering how many shares you issue and at what value.
In modern private limited companies the value of shares is not directly tied to the value of the company. You can set the value of shares at whatever level you like and issue as many or few as you want. A common set-up for small limited companies is to have 100 shares with a nominal value of £1 each.
If, in this kind of set-up, you have an investor who wants 20% of your company you could sell them 20 of your shares for £50,000. Although the shares would only be worth £20 you can get them to pay a share premium of £49,980 to make up the difference. By purchasing 20 shares in your company your investor would then typically have 20% of the voting rights in your company and be eligible for 20 lots of any dividends you pay out.
Although you can charge a premium when you sell shares you are not allowed to sell them at a discount or give them away. However you can sell shares for nil value or part payment as long as this is properly recorded in the company accounts.
When you form a company using our website you will be able to specify the number of shares allocated and who gets them.
Most small limited companies will have what are known as ‘ordinary shares’. This means that all of the shares in the company carry the same voting rights and dividend payments. However it is possible to create different classes of shares. You can name these how you like but they will often be referred to as ‘Class A’ and ‘Class B’ shares.
A common usage of different share classes is to give shares to employees. You can create ‘non-voting’ shares where your employee will have a stake in the company and be entitled to a share of the profits through dividends but they won’t get any voting rights. Similarly you can create classes of shares which carry extra voting rights or which are entitled to higher levels of premiums.
If you are thinking about creating different classes of shares our legal team will be able to offer guidance on the best way to proceed. You can call them on 01245 492777.