 | An excerpt from Lawpack's Limited Company Formation Kit. |
A limited company consists of one or more shareholders who own shares. When a limited company is formed it’s incorporated with an ‘authorised share capital’.
When a limited company is formed, it issues shares to its shareholders. These company shares are paid for with money, property or services.
What’s the difference between authorised share capital and issued share capital?
Say, for example, that a limited company has an authorised share capital of £100 and each company share has a nominal value of £1.
Its shareholders apply for two company shares and the limited company issues the shares. So the limited company has an issued share capital of £2 and an authorised share capital of £100.
The limited company directors issue the remaining 98 company shares, comprising the authorised share capital.
Provided that the shareholders have passed an ordinary company resolution to increase the share capital, the company directors can issue the limited company shares comprising the increased share capital.
Is there a limit to how many shares can be issued by the limited company?
The authority in the Articles of Association allows the company directors to issue shares up to a maximum nominal amount equal to the authorised share capital.
Note that this authority expires five years after the date of the limited company formation.
Can the limited company accept cash for shares?
If limited company shares are to be allotted for cash, there are statutory rules governing the manner and timing of such an offer. These limited company rules state that company shares must be offered to existing shareholders, in proportion to their shareholdings.
If you, as company director of a limited company, want to exclude these rules (e.g. if you want to offer shares to a new shareholder) you should take legal advice.
Can company shares be issued at a higher price?
A limited company can issue shares at a price greater than their nominal value to bring more money into the limited company, while protecting the voting rights of existing shareholders and avoiding the procedures required to increase the authorised share capital of the company.
For example, £1 shares could be sold for £10 with the difference between the actual and nominal value of each company share (£10 – £1 = £9) being held in a separate account, known as a ‘share premium account'.
Remember that no private company is allowed to issue or cause to be issued any advertisement offering shares for sale to the public.
Can the limited company issue additional shares?
Once the limited company directors have issued all the shares in the authorised capital, no additional company shares may be issued unless the share capital is increased by an ordinary company resolution of the shareholders.
Also, the shareholders must authorise the limited company directors to allot any shares represented by the increased capital.
Are the limited company’s shareholders entitled to dividends?
Shareholders are entitled to any dividends declared by the limited company, plus a proportion of the limited company’s assets on dissolution.
How are the limited company’s shares paid for?
Company shares may be paid for, nil paid (unpaid) or partly paid for on issue.
If the company shares are partly paid for or nil paid, the limited company will be entitled to ask for the balance owed on each share and the shareholder must pay it.
Further information
Article: Issuing shares and share certificates
Article: How to call and run a shareholders' meeting
Download: Approval and Register of Transfer of Shares company resolution
Download: Agreement for Selling Shares in a Limited Company form
Download: Agreement for Selling & Buying Shares in a Limited Company form
Download: All the company resolutions and company minutes you need for your business today
Download: All the limited company formation forms and advice you need
