Contractors’ guide to limited company shares and shareholders

When setting up your own limited company, it’s important to get every step correct from the offset. Company name, registered address, potential service address, company director/s and any company secretary. Like anything, trying to amend a problem down the line can just create more problems!

Here, exclusively for ContractorUK, we breakdown the real nitty gritty of that company formation process – limited company shares and shareholders, writes Christian Hickmott, managing director of Integro Accounting.

What is a company share?

Shares are only applicable to a limited company. If you are a sole trader, you are unable to delegate shares for the business. As a sole trader you and your business are one in the same. As a limited company, you and your business are two separate entities.

A share is, ultimately, owning a percentage of the business. The individual who sets up the business would usually allocate the shares in the company. At the start they would need to clearly state who is the shareholder, the type of share they own, and the value of it.

What type of shares are there?

There are various types of shares that can be issued for a limited company. However the most common is an ‘ordinary share’. Also referred to as ‘common shares,’ these ordinary shares entitle the holder to a portion of profits via dividends – again though, the portion of which needs to be stated at the start of setting up the business.

There are other varieties of shares which include:

  • ‘Non-Voting Shares’ – shareholders will be given a portion of the profits from the business, however they will not be allowed any input or votes into the running of the business.
  • ‘Preference Shares’these ensure that the shareholder is provided a set dividend amount annually.
  • ‘Redeemable Shares’ -- can be provided under the condition that they may be paid back into the company at a future date.

Should you at any stage feel unsure which share would best suit your business, or a potential shareholder, an accountant is invariably the best person who can guide you.

Who can be a company shareholder?

A company shareholder, or a ‘member’ as some call it, owns shares in the business. There can be more than one company shareholder, and the shareholders can largely be anyone. The roles and responsibilities of shareholders can be clearly stated when the company is set up as to their volume of input and responsibilities, along with the percentage of shares allocated against them. The following criteria must be met when appointing a shareholder:

  • The shareholder must not be under 16-years-old.
  • Must not have declared bankruptcy.
  • Must not have been stricken off as a company director previously.

For a one-person limited company, many will allocate themselves as sole shareholder and company director, owning and running 100% of the business. The company shareholder holds shares in the business, however, the company director will manage the day-to-day running of the business. So, allocating both, they have complete insight into all aspects.

What are the advantages of being a shareholder?

The greatest benefit to being a company shareholder is that you benefit from profits generated in the business. You can do this without having any roles or responsibilities allocated against the business -- that responsibility would lie with the company director, who manages the day-to-day running of the company.

If allocated ordinary shares, you can also have the right to attend shareholder meetings and offer guidance in direction of the business.

What is the value of company share?

A share can hold whatever value allocated. By default a share normally has a common value of £1. A share shows your investment in the business. We always advise contractors and other individuals who are our clients that irrelevant of the amount, it is more about the percentage of ownership you have in the business.

For example, for a one-person limited company, if you were the sole shareholder, you would hold 100% of company shares. Those shares can be valued at £1 (the most common value allocated per share); £10, £100, or even £1,000.

If you allocate those shares, remember you will have to buy them at whatever cost you allocate and invest it back into the business -- i.e., if you place 1,000 shares you will have to place £1,000 back into the business. So it’s more than recommend to seek professional advice at the beginning, particularly if your situation is a little more complex.

Can you amend a company share at any time?

You can amend shares at any time, but if it’s not done correctly, it can create problems later down the line.

You must inform Companies House of any amends online within 14 days of any changes. The information you must provide is sometimes known as a ‘Statement of Capital’; this needs to include:

  • Change in total number of shares
  • Change in share value
  • How many shares have/have not been paid for
  • The type of share and the rights allocated
  • Total value before any other costs have been included.

If not done correctly you could be at risk of capital gains tax charges. That’s because HMRC could argue that you have made money on your shares that are now changing, therefore determining that there are wider tax implications.

Lastly, start out on the right foot, potentially with reassurance...

Starting your business on the right foot means less complications later – and shares and shareholders can be far from straightforward. If both seem too daunting to even approach, some company formations services and accountants can help (ourselves included). So there is reassurance available with setting up your contractor business if even the help-sheets and guidance on these essential limited company components seem overwhelming!

Thursday 6th Oct 2022
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Written by Christian Hickmott

Founder and CEO of Integro Accounting, Christian Hickmott has over 20 years of accountancy and working practice knowledge. He understands the wants and needs of contractors, having lead some of the largest accountancy firms in the business before founding Integro Accounting in 2013. A brand based on integrity, trust and loyalty.

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