When people start up a small business, they usually form a company limited by shares. The benefit of forming such a company is that the shareholders have limited liability, which means that if the company fails, creditors cannot seize their personal assets.
But what are shares? How do you go about issuing them? And what are share certificates? How do you make a stock transfer? Here is our guide to all you need to know about issuing shares in your business.
Why should I be issuing shares?
When you sell shares in your company, it's a good way of raising long-term finance for your business, and you don't have to repay the finance or pay interest on the investment as you would with an overdraft or bank loan.
An individual who buys shares in your company will become one of the owners of the company. Shareholders choose who runs a company and are involved in making key decisions about the running of the business.
People who run small businesses usually give out shares in their company in return for a lump sum investment. This may either be from friends and family, or from outside investors looking for a high yield.
How do you go about issuing shares?
When you first set up your company, whether it's an unlimited or limited company, you can decide on the level of share capital - the company's authorised capital - and its division into fixed priced shares.
To do this, you draw up a Memorandum of Association, which outlines the amount of share capital the company will have and the division of the share capital.
The founders of the company (e.g. you and your investors) must the sign the Memorandum of Association and state the number of issuing shares. These are then issued upon incorporation (i.e. forming the company legally). The money paid for the shares - which can be a nominal value of £1 or more - must be held by the company.
To provide shares to your investors, why not purchase our Share Certificate Form, or you can find two copies of share certificates, plus all the guidance you need on how to issue share certificates, in our Limited Company Kit.
But what is 'issued capital'?
Your company doesn't have to issue all of its capital at once. Issued capital is the nominal - rather than actual - value of the part of the authorised share capital which has been issued to the shareholders.
A company with an authorised capital of 1,000 shares at £1, for example, which issues 500 shares, has an issued share capital of £500.
If there are any unissued shares, the directors can issue shares later, as long as they abide with the rules outlined in the Articles of Association. This usually occurs through an ordinary resolution. The company sets the price of these shares. You must let Companies House know if you issue new shares.
Do I need to issue share certificates?
You must provide your shareholders with a title document to their shares, so you do need to issue share certificates to them.
Each certificate must include the following information:
Issue share certificates now with our Share Certificate Form, available for immediate download, or get two in our Limited Company Kit.
What are the types of shares?
There are four types of shares a company can issue:
How do I make a stock transfer?
If you run a limited company, you can transfer shares through brokers using the Stock Exchange CREST network service. If it's a private or unlimited company, you can usually make a stock transfer by private agreement between the vendor and buyer, subject to the company's rules and the directors' approval. If you want to make a stock transfer, our Stock Transfer Form can help. It's an easy-to-use document, which can be downloaded immediately from our site, and is approved by legal experts.
You do have to pay tax when you sell or make a stock transfer. You normally pay stamp duty, and any gains you've made through selling shares can be liable for Capital Gains Tax.
Published on: June 2, 2008