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Shares:: Why Are Shares Issued?

Shares represent ownership in a company. Shareholders choose company leadership and make key decisions. While shares are associated with stock markets, most small businesses issue shares to friends and family or formal investors in exchange for lump sum investments. Issuing shares provides new financing and incentives for employees while allowing founders to exit their investment. When setting up a company, the amount and division of shares must be filed with Companies House. Further shares can later be issued by directors according to company rules.

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82 views7 pages

Shares:: Why Are Shares Issued?

Shares represent ownership in a company. Shareholders choose company leadership and make key decisions. While shares are associated with stock markets, most small businesses issue shares to friends and family or formal investors in exchange for lump sum investments. Issuing shares provides new financing and incentives for employees while allowing founders to exit their investment. When setting up a company, the amount and division of shares must be filed with Companies House. Further shares can later be issued by directors according to company rules.

Uploaded by

Muhammad Talha
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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SHARES:

Shares represent ownership of a company. When an individual buys shares in


your company, they become one of its owners. Shareholders choose who
runs a company and are involved in making key decisions, such as whether a
business should be sold.

Why are shares issued?


While shares are most obviously associated with the stock market, most
small businesses don't go near a stock market in their lifetime. They are
more likely to issue shares in their company in return for a lump sum
investment. This investment may either come from friends and family or, for
businesses that are looking for capital to fund high growth, through formal
equity funding finance.

Formal equity finance is available through:

business investors
venture capital firms
stock markets

These investors are willing to put up capital for a share in a growth business.
The advantage of raising money in this way is that you don't have to pay the
money back or pay interest to the investors. Instead, shareholders are
entitled to a share of the distributable profits of the company, known as
dividends.

Issuing shares in your company on a stock market can provide:

new finance
an exit for founding investors who want to realise their investment
a mechanism for investors to trade shares
a market valuation for the company
an incentive for staff using shares or share options
an acquisition currency in the form of shares
a way to raise your business' profile

How are shares issued?


When you set up a company with share capital, you can decide on the level
of share capital and its division into fixed priced shares.
A statement of capital and initial shareholdings must be delivered to
Companies House on form on incorporation of the company.

This will set out:

the amount of share capital the company will have


the division of the share capital

The founders of the company must sign form and the memorandum of
association and state the number of shares they want. These are then issued
upon incorporation.

Family or friends
You may choose to issue shares to family or friends in return for investment
in your business, rather than accepting the offer of a loan from them. That
way you're not obliged to make repayments. It is important to formalise any
agreement with family members or friends as this can help you avoid or
resolve any disputes that may arise in future. For more information see our
guide on financing from friends and family.

Employees
Employee share ownership schemes offer employees a stake in the business,
encouraging loyalty and helping you to retain key staff. They also provide an
incentive or reward for performance and can help recruitment. See our guide
on how to set up employee share schemes.

Issued capital
A company need not issue all its capital at once. Issued capital is the nominal
- rather than actual - value of the part of the share capital that has been
issued to shareholders.
For example, a company that issues 500 shares at 1 each has an issued
share capital of 500.
Public limited companies (plcs) must have at least 50,000 worth of issued
share capital before they are allowed to trade. Initially they must satisfy this
requirement by means of shares in sterling or in euro shares (and not by a
combination of the two).

Further shares can be issued in the company by the directors, subject to the
rules set out in the Articles of Association, but typically by being authorised
to do so by ordinary resolution of the company's existing members. An
exception to this is that the directors of a private company incorporated
under the Companies Act 2006, which will only have one class of shares, do

not need any prior authorisation from the company to allot shares. The
directors set the price of these shares.

Types of shares
A company may have many different types of shares that come with different
conditions and rights.
There are four main types of shares:

Ordinary Shares
Ordinary shares are standard shares with no special rights or restrictions.
They have the potential to give the highest financial gains, but also have the
highest risk. Ordinary shareholders are the last to be paid if the company is
wound up.

Preference shares
Preference shares typically carry a right that gives the holder preferential
treatment when annual dividends are distributed to shareholders. Shares in
this category receive a fixed dividend, which means that a shareholder would
not benefit from an increase in the business' profits. However, usually they
have rights to their dividend ahead of ordinary shareholders if the business is
in trouble. Also, where a business is wound up, they are likely to be repaid
the par or nominal value of shares ahead of ordinary shareholders.

Cumulative preference
Cumulative preference shares give holders the right that, if a dividend
cannot be paid one year, it will be carried forward to successive years.
Dividends on cumulative preference shares must be paid, despite the
earning levels of the business, provided the company has distributable
profits.
Redeemable shares come with an agreement that the company can buy
them back at a future date - this can be at a fixed date or at the choice of the
business. A company cannot issue only redeemable shares.

Shares and shareholders


Sale and transfer of shares
Share dealing is a complex area and specialist advice should be sought from
solicitors, accountants and company law agencies.

Transfer and transmission of shares


Shares in a listed company are transferred through brokers using the Stock
Exchange Euroclear service. However, in a private or unlimited company,
shares are usually transferred by private agreement between the seller and
buyer, subject to the company's rules and approval of the directors.

Certain taxes apply when you transfer or sell shares:


If you are transferring shares yourself using a paper stock transfer form
Stamp Duty may be payable when the value is over certain limits. Stamp
Duty reserve tax is normally payable when you transfer shares through a
broker using the service. When a shareholder dies or becomes bankrupt,
their shares and the rights associated with them must be given to a personal
representative or executor.

Issuing a prospectus
If you want to list your company on the Stock Exchange, or offer unlisted
securities to the public, you need to publish a prospectus or listing
particulars. Only a public limited company can do this.
The prospectus has Four main functions:

setting out all the information that you must make public under the
Listing Rules

acting as a marketing tool for shares in your company by describing


the business and its prospects
setting out the price of your company's shares and how much capital
you hope to raise
The UK Listing Authority, part of the Financial Services Authority, must
approve the prospectus.

Paying dividends and paying tax


At the end of a calendar year, a company's board decides whether the
business has done well enough to pay shareholders a dividend. A dividend is
a part of the company's profits that is given to shareholders. In larger
companies, it is common for an interim dividend to be paid at the half-year
point. The dividend is calculated per share, so the more shares you own, the
more money you get. Dividends attract income tax, but not National
Insurance charges.
Many company share schemes allow employee shareholders to reinvest
dividends in further shares called dividend shares. A maximum of 1,500 in
dividends can be reinvested in this way each year. If an employee holds
these shares for three years, they pay no income tax on them. If not, the
dividend used to pay for the shares becomes taxable.
When paying dividends, the company must send a dividend voucher to the
shareholder by post. This shows the amount of the dividend and the amount
of tax credit. The tax credit indicates the amount of tax paid by the company
on the shareholder's behalf. Dividends are paid after tax has been deducted
at the basic rate. If you pay a higher rate of tax, you may be liable to pay
additional tax on your dividend.
Companies can pay dividends electronically if a shareholder agrees to it.
Companies no longer need to send a dividend voucher in such cases.

Making changes to share capital


Companies can alter their share capital through a number of routes. You
should consult your accountant or legal adviser to find the best route for you.

Issuing shares to a new shareholder


A company can issue shares to a new shareholder by authorising the
directors to allot shares. The authority can be in the articles or given

by an ordinary or elective resolution. Allotment creates a right to be


issued with the shares.
Changing the shares
A company can consolidate or subdivide its share capital if authorised
to do so by the articles. Consolidation is when the shares are put
together and then divided into shares of larger amounts, eg 200 shares
of 1 are consolidated to create 100 shares of 2.

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