Ultimate Guide To Shares and Shareholders

Many small businesses operate as sole traders, particularly when they first start out. Sole traders are owned and managed by one individual and offer a simple structure for SMEs trying to find their footing. However, once the sole trader starts seeing success and developing the business further, it may be smarter to operate as a limited company instead: there are tax and legal benefits, and it offers the option to sell company shares.

A share represents partial ownership of a business. Shares are crucial to gaining the investment necessary to scale a business from a small, single-location company to a regional or nationwide operation. Without the ability to sell shares or offer them to potential investors, a business may not be able to secure the funds necessary to grow and succeed.

Additionally, sharing company ownership between multiple individuals helps build the level of expertise and the internal pool of skills within that company.  Having extra shareholders also means having a surplus of people available to rely on when the business faces challenges. It also means having more help with decision-making: a principal right of many shareholders is that they can vote on the company’s decisions.

If you’re intrigued by the idea of forming a limited company and selling shares or are looking to become a shareholder, this guide is for you. We’ll examine what types of shares a company can offer and how the process of issuing shares works. We’ll also explain shareholder rights and list the benefits of owning shares in a company.

 

Types of Shares

There are multiple types of shares a company can issue to shareholders. A single company can issue various share types: for example, a company may issue ordinary shares to most of its shareholders, but others may only receive non-voting shares. Below, we’ll define each of the five main share types to help you better understand the benefits and characteristics of each.

• Ordinary Shares: By far the most common type of share is an ordinary share. These come with no special shareholder rights, but they also have no particular responsibilities or restrictions associated with them. An ordinary share reflects equity ownership in the company and provides the right to vote on company decisions and a right to dividends. A dividend is a portion of the company’s earnings, with each valid shareholder receiving a dividend depending on the shares they own. Finally, owning an ordinary share means that the shareholder is entitled to some of the company’s assets in the event of winding up, which is the closure or liquidation of a limited company.
• Preference Shares: Like ordinary shares, preference shares entitle the shareholder to dividends. However, when it comes time to share out dividends (or for assets and capital to be portioned out during winding up), preference shares receive the amount they are due before ordinary shares. Preference shares are often issued to investors, as they represent an incentive to contribute to the business’s success. However, preference shares for investors are often also non-voting shares.
• Non-Voting Shares: Non-voting shares are exactly what they sound like — they entitle the holder to dividends but do not provide the right to vote on company decisions. Non-voting shareholders also do not have the right to attend general meetings. These types of shares are commonly issued to company employees or family members of the principal shareholders.
• Cumulative Preference Shares: Sometimes, a limited company will not be able to pay its shareholders the dividends to which they are entitled. In these instances, shareholders with cumulative preference shares will be entitled to any dividends not paid the previous year and the dividends from the current year. Moreover, paying unpaid dividends takes precedence over paying dividends to ordinary shareholders. Like a regular preference share, cumulative preference shares are often non-voting shares.
• Redeemable Shares: Shares are rarely issued with the intent that the shareholder owns them permanently. For example, redeemable shares are issued on the condition that they will be sold back to the company at a later date. The redemption price is usually the same as the issuing price, but not always. The non-voting shares often given to employees are often redeemable — so when the employee leaves, the shares can be sold back to the company and then issued to new employees.

 

Issuing Shares

Since issuing shares significantly impacts a company’s legal ownership and structure, it’s important to follow the correct procedure. It’s also important to note that the process of issuing shares is significantly different depending on the timing: whether it is done as the company is being formed or later on when it is fully established. <h3>Initial Share Issuance</h3>

When a company issues stocks during its initial formation, the first step is for the board of directors to decide the type of shares being issued, specifically the rights and responsibilities that come with them (voting rights, preference for dividends, etc.). Companies House must also be made aware of the share issuance; checking the government website page on shares is the best way to find out how to do this.

Then, shares must first be offered to the intended recipients, who (if they accept) must complete an application for new shares. Once this is done, the company must convene a meeting of their board of directors. The primary aim of this meeting is to approve (or deny) the issuance of shares, but more specifically, the directors should:

1. Approve the applications for shares received
2. Authorise the issuance of shares and say who they’re being allotted to
3. Instruct the required form(s) to be submitted to Companies House
4. Authorise the issue of share certificates for the new shareholders
5. Instruct the required updates to the register of members (which lists the company shareholders) and register of allotments (which lists what shares have been issued and applied for)

Once the new shareholders’ names are entered into the register of members, the shares have officially been issued. However, shareholders generally also receive either a physical or digital certificate of the shares they now own.

Finally, within a month of the initial share issuance, a statement of capital must be sent to Companies House. This statement breaks down all of the details of your share system — how many shares there are, their value, the type of shares they are, and the rights and responsibilities they confer to shareholders (specifically the voting rights).

 

Subsequent Share Issuance

Sometimes, a limited company issues more shares after its initial formation. This is primarily done to raise more capital for the business (as providing shares to investors can encourage them to invest in the company). However, as with the initial share issuance, it’s important to follow the correct procedure when issuing shares after incorporation.

The first step in issuing shares is ensuring that the company has the right to do so, but this varies from business to business. In some instances, directors can issue new shares without a vote, but it’s more common that issuing new shares requires a resolution to be passed by the shareholders or board of directors. In other companies, their articles of association (the rules the company establishes that guide how it is run) may prohibit new shares entirely, as they can dilute control of the company if given to new investors.

Once both these steps have been taken, the shares can be issued, and the new shareholders recorded in the same way as in the initial issuance (i.e. updating the registers of members and allotments, and issuing certificates). However, within one month of the new share issuance, the company must submit a Return of Allotment form to Companies House, and they must update their statement of capital when the company files its confirmation statement.

 

Shareholders Rights and Responsibilities

As they own a partial stake in a company, shareholders are entitled to certain benefits, but also have obligations that they must fulfil. These rights and responsibilities will differ depending on the shareholder’s share, so it’s crucial to remember what they are. If you’re a shareholder and fail to fulfil your obligations, you could be subject to legal action by the company. Similarly, you won’t get the full benefits of owning shares if you don’t understand your shareholder rights.

Shareholder Rights

• Voting Rights: Shareholders have the right to vote on company decisions, but typically only when those decisions will fundamentally change the company, such as electing new directors, mergers, or liquidation.
  • Majority and Minority Shareholders: Not all shareholders have equal voting rights. A shareholder owning more than 50% of a company’s shares is a majority shareholder. Decisions that only require 50% of votes in favour of passing can be approved by that shareholder alone because they own more than 50% of the votes individually. Minority shareholders are those with less than 50% of the company’s shares (often, they have far less than 50%, but this varies). While this comes with less voting power, laws are in place to prevent majority shareholders from making decisions that would harm their minority shareholders.
• Dividends and Profit Sharing: Shareholders can earn money through capital appreciation, which means as the company grows, their shares will be worth more. However, shareholders also earn money via dividends: the board of directors will declare dividends, which means a percentage of the company’s profits (also decided by the directors) will be shared among shareholders.
• Pre-emption: As discussed above, a common shareholder right is the right to pre-emptions, which means that existing shareholders can purchase new shares or shares being transferred before non-shareholders.
• Viewing Company Records: Shareholders can view typically private company records, such as bylaws, the minutes of board meetings, and financial statements.

 

Shareholder Responsibilities

Unlike shareholders rights, which tend to follow the same rules industry-wide, shareholder responsibilities (or obligations, as they are often called) can differ significantly as they are solely defined by the company’s articles of association. However, typical examples include:

• Fiduciary Duties: Shareholders must act in the best interests of the company, avoiding conflicts of interest and exercising their powers responsibly (this is one of the ways majority shareholders have their power restricted.
• Non-Compete: A non-compete clause means that shareholders cannot take actions that would harm the interests of the company by benefitting a competitor or creating a competing business. Typically, this obligation specifically means they cannot use their insider knowledge of their own company to take these actions.
• Non-Disclosure: Often, a shareholder will be privy to private company information. As a shareholder, they have a legal obligation to not reveal this obligation to people outside the company.

 

Shareholders’ Meetings

Holding regular shareholder meetings is a regulatory requirement. Shareholders have the right to attend the meetings, but are rarely obligated to (however, failing to attend may mean losing out on the opportunity to vote).  There are multiple kinds of shareholder meetings:

• Annual General Meetings (AGMs): An AGM is a chance for a company’s board of directors and shareholders to meet and share information. Typically, the board of directors share the financial performance of the company, the shareholders can ask company executives questions or raise concerns, and both parties will vote on issues facing the company.
  • Notice: It is a legal requirement for companies to set out the date, time and agenda of an AGM in advance.
• Extraordinary General Meetings (EGMs): Sometimes, urgent matters will need to be voted on immediately and cannot wait until the AGM. In these instances, an EGM will be called. Examples of issues that may require an EGM are legal problems or voting on replacing or removing a key manager.

 

Transferring Shares

Shares are not a permanent fixture of a shareholder’s portfolio. They can be exchanged, often for cash payments, the removal of debt, or as a gift to family members or spouses. The process begins by filling out a stock transfer form. There is no government-issued version of this form; it must be sourced from a stock broker, company registrar, or a lawyer or accountant who deals with share transfers.

Once the form is completed, it must be sent to HMRC to be stamped (which legitimises the transfer. It’s important to consult the HMRC website for the best way of getting the form to them. Once the form is stamped, the transfer of shares must be approved by the board of directors, and in some cases the right to pre-emption must be waived (so that existing shareholders can’t purchase the shares before the intended recipient gets them).

When the transfer is complete, both the recipient and original owner get a copy of the stock transfer form, and the new shareholder receives their share certificates. Companies House will be alerted to the new shareholder in the company’s next confirmation statement.

 

Shareholders’ Agreements

Partial details on what it means to be a shareholder can be found in the articles of association, or a company’s statement of capital. If you’re looking for the whole story, you’ll need to see the shareholder agreement.

This is a document that clearly defines:

• Shareholders rights and responsibilities
• The total number of company shareholders and shares issued
• Who can become a shareholder, and how
• The process of pricing and selling shares
• Safeguards for minority shareholders and restrictions on majority shareholders

The shareholders agreement may also include mechanisms for resolving shareholder disputes. For example, there could be guidelines for third-party mediation, share buy-out, or even steps for taking legal action.

 

Tax Implications for Shareholders

As they can be a significant financial asset, shares may have a impact on the taxes an individual pays:

• Income Tax on Dividends: An individual can receive an allowance for how much of a dividend before paying tax. That allowance is £500 for the tax year 2024-25, but this is subject to change. For dividends greater than £500, tax must be paid under your income tax band::
  • Basic rate: 8.75%
  • Higher rate: 33.75%
  • Additional rate: 39.35%
• Capital Gains Tax: Capital gains tax is paid when an individual makes a profit by selling assets like property or shares. If you sell your shares, you need to know the gain, which is the difference between the price you bought the shares and the price you sold them at. As with dividends, there is an allowance for this: you can earn £3,000 in profit by selling your shares before paying capital gains tax, the rate of which also depends on your income tax band.
• Inheritance: Individuals receiving shares via an inheritance often don’t need to worry about paying inheritance tax. However, they will likely need to pay income tax on dividends or capital gains tax when they sell the shares. Shareholders looking to will away shares need to consult the relevant shareholders agreements and articles of association before drawing up the document, as the company the shares originate from will have the final say on how those shares can be transferred.

 

Benefits and Risks of Owning Shares

Benefits of Owning Shares In a Company

• Potential For Capital Growth: If the company grows and the economy improves, your shares will be worth significantly more that they cost to buy. This potential for capital growth strengthens your portfolio and represents the primary reason that people invest in stocks and shares.
• Dividend Income: Earning dividends through owning shares is a fantastic example of passive income, as the shareholder requires little effort to earn the income.
• Voting Rights: Owning shares allows you to influence company decisions, which could help you increase the value of your shares if you push the company in a more profitable direction.
• Protection Against Inflation: Inflation reduces the purchasing power of money, but historically, it has had a much lesser effect on shares. Buying shares prior to a period of inflation can help you stay financially stable in tough economic times.

Risks of Owning Shares In a Company

• Market Volatility: The value of shares can change rapidly, depending on a vast range of factors. Buying shares requires a careful risk assessment before fully investing.
• Risk of Losing Investment: If a share loses its value, then there is little a shareholder can do to restore that value. As such, investing in shares comes with a significant financial risk.
• Tax Obligations: As we explained above, capital gains tax can severely impact the profits you gain from selling shares and receiving dividends.
• Difficulty: Buying and selling shares is not a get-rich-quick scheme. It takes significant industry knowledge to make it a profitable venture.

 

Shares and Shareholders: The Key Points

We’ve covered a vast amount of information on shares and shareholders above. To help you digest and retain the details of this article, we’ve included some key details below:

• Types of Shares: There are a number of different types of shares. If you own shares, make sure you check the company shareholder agreement or articles of association to learn details about the type of shares you own (e.g. whether they have voting rights, if they are redeemable, etc).
• Issuing Shares: There are different procedures depending on if a company is issuing shares when they are first incorporated or later on. Following these procedures, particularly updating HMRC and Companies House, is a hugely important legal requirement.
• Shareholder’s Rights: The owners of shares have a variety of rights and responsibilities, from the power to vote on company decisions to the obligation to act in the company’s best interests.
• Meetings: Shareholder meetings usually occur once a year and are a great opportunity for company directors to discuss the company’s performance.
• Transfers: As with subsequent share issuances, a strict procedure must be followed when transferring shares between individuals.
• Shareholder Agreements: A hugely useful document for a shareholder is the shareholder agreement, which details the rights, responsibilities and dispute resolution rules for shareholders.
• Taxes: As a financial asset, owning and selling shares will affect the taxes you pay. Specifically, dividends you earn will be taxed, and selling shares will usually incur capital gains tax.

 

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