Shares and Shareholders: Basics for Small Companies

Shares are the units of ownership in a limited company, and shareholders are the people who hold them. A company limited by shares needs at least one shareholder, who can also be its director, and the number of shares each person holds decides their share of votes and dividends. This guide explains the basics a small company owner needs: what you set up at formation, what the paperwork means and what to report when shares change.

Key takeaways

• Shareholders own the company. Directors run it. One person can be both.
• At least one shareholder is required and there is no maximum.
• A shareholder's liability is limited to what they invested in their shares.
• Tell Companies House within a month if the company issues more shares.
• Anyone with more than 25% of the shares or voting rights is a person with significant control.

What are shares and shareholders?

Most UK companies are "limited by shares". GOV.UK describes such a company as one that is owned by shareholders who have certain rights, pays profits to them through dividends, and may need them to vote on changes. A shareholder is sometimes called a "member", and the first shareholders named at formation are also called "subscribers".

According to GOV.UK's guidance on choosing your shareholders, shareholders can control the company and make important decisions, be paid a share of its profits through dividends, and use their votes to agree changes.

Share value, share capital and limited liability

The price of an individual share can be any value. Many small companies use £1 shares. Share capital is the number of shares multiplied by their value, so a company that issues 500 shares at £1 each has share capital of £500. GOV.UK points out that share capital is not linked to how much the company is worth.

Limited liability means a shareholder's exposure is limited to the amount they originally invested. If shares have not been fully paid for, GOV.UK says shareholders will need to pay for them in full if the company has to shut down. That is why a low share value keeps the commitment modest.

Shareholders and directors compared

Our guides to director responsibilities and how to add or remove a company director cover the other side of the table.

What you provide when the company is formed

When you register a company limited by shares, details of the shares and shareholders go in a document called the statement of capital. GOV.UK's page on company formation documents says you must include:

• the names and addresses of all shareholders;
• the number of shares of each type the company has and their total value.

You must also give the "prescribed particulars", which describe the rights each class of share carries. GOV.UK lists what share of dividends the holders get, whether they can exchange (redeem) their shares for money, whether they can vote on certain company matters and how many votes they get.

Alongside this sit the memorandum of association, a statement signed by the initial shareholders agreeing to form the company, and the articles of association, the written rules for running it. Many small companies adopt the standard model articles.

Share classes in brief

Most companies are set up with one class of share, normally called ordinary shares. Ordinary shareholders usually get one vote per share and are paid dividends. A company can issue different classes with different rights, but that changes who controls the company and who is entitled to what, so it needs legal and tax advice first. It is not something to set up from a template.

Votes, resolutions and dividends

Some decisions belong to the shareholders. GOV.UK gives changing the company name, removing a director and changing the articles as examples. Agreeing such a decision is called passing a resolution. Most need a majority (an ordinary resolution) and some need a 75% majority (a special resolution). When working out a majority you count the shares that carry votes, not the number of shareholders. A meeting is not always needed, as a resolution can be confirmed in writing.

Dividends can only be paid out of available profits and must usually be paid to all shareholders. Each one needs a directors' meeting, minutes and a dividend voucher. See dividend vouchers and board minutes for the paperwork.

People with significant control

A shareholder who owns more than 25% of the shares or voting rights is classed as a person with significant control (PSC). So is anyone who can appoint or remove a majority of directors, or who can influence or control the company. You must identify your PSCs, tell Companies House who they are, and report changes within 14 days.

Checklist: when shares or shareholders change

1. Read the articles and any shareholders' agreement to see what approvals are needed.
2. Get the approvals from directors and, where required, shareholders, and keep a written record.
3. Update the company's own records. A company must keep details of its shareholders, the results of shareholder votes and resolutions, and transactions when someone buys shares.
4. Tell Companies House within a month if new shares have been issued, using form SH01.
5. Check your PSCs. If anyone has moved above or below 25%, report it within 14 days.
6. Confirm the position on the next confirmation statement. The statement of capital and shareholder information are checked there. See the confirmation statement explained.
7. Take advice first if the change involves a new share class or someone leaving. The reporting rules are on GOV.UK under company changes you must report.

Worked example (illustrative)

"Harlow Lane Studio Ltd", an illustrative example, is a design company formed by two founders with 100 ordinary shares of £1 each. One founder holds 60 shares and the other 40, so share capital is £100. Both hold more than 25%, so both are PSCs. With one vote per share, the first founder can pass an ordinary resolution alone, but a special resolution needs 75%, so it needs both of them.

Later the company issues 20 new shares to a third person. There are now 120 shares. The founders hold 50% and about 33%, and the newcomer about 17%. The first founder no longer has a majority alone, and the newcomer is below the 25% PSC level on shareholding. The company updates its own records and tells Companies House within a month.

The company and figures are invented for illustration and are not a real client.

Common mistakes

• Treating shareholder and director as the same thing. The rights, duties and pay routes differ.
• Confusing share capital with company value. A £100 share capital says nothing about what the business is worth.
• Issuing shares and not telling Companies House. The time limit is a month.
• Forgetting PSC changes. They must be reported within 14 days.
• Paying dividends out of line with shareholdings. Dividends usually go to all shareholders.
• Not thinking about dilution. New shares reduce existing percentages and can change who has a majority.

For how owners usually take money out, see director salary vs dividends.

How we can help

We look after the accounts, Corporation Tax, confirmation statement and dividend paperwork for small companies, and flag when a share change needs reporting or specialist legal advice. Limited company packages start from £75 per month on a fixed fee. See our limited company packages, view our pricing, or contact us to talk it through.