The Different Types Of Shares And Ownership Of A Limited Company

If you have decided to incorporate your company as opposed to acting as a sole trader, you will need to understand the types and class of shares that you could issue. In order to issue shares, you have to provide the company name and address, the director and shareholder and the agreement of all initial shareholders to create your company.

When first forming your company, there is not a set type of share that you have to use. Ordinary shares are those that are typically issued by small companies. These shareholders have rights to dividends, meeting votes and the distribution of company assets if and when the company is sold. If the company has only one shareholder, then a single share is typically used. If there are more shareholders however, then different amounts of resources are used and these different shares lead to different types of ownership and different rights for each shareholder.

Ordinary shares are the most common type. These carry one vote per share and allow the owner to participate in company dividends. There are also non voting ordinary shares which carry no right to vote or attend meetings. These are often given to employees.

Preference shares allow the owners to receive a fixed amount of annual dividends. Redeemable shares are issued assuming that the company will purchase them back at a future date. They can be fixed or set at the discretion of the director. This is typically done along with non voting shares in order to ensure that if the employee leaves the company, the shares can be bought back at nominal value.

It is also important to understand the different classes of shares. Some companies create what are called alphabet shares with each corresponding letter representing a different type of company share.

Some shares offer entitlement to dividends, and offer the right to a normal dividend or a preferential dividend that is to be paid before other share classes. Each typically offers the right to vote and entitlement to capital on disposal. This simply means that if the company is sold or wound up the assets that are left over after all debts are paid can be distributed to the company shareholders. Different classes of shares in this instance may have different rights to the distribution of the company’s capital.

Companies are permitted to make changes to share capital before that company is incorporated but it is important to understand that these changes can also be made after incorporation. This is a much more complex undertaking but it can be done. In order to alter the class of shares in the company, a new articles of association must be drafted after the resolution. This takes a bit of time and can be quite expensive so it is recommended that share classes be decided upon before incorporation. When issuing shares in a company, it is strongly advised that company owners plan for the long term and consider any growth or other aspects that could change how shares are laid out before incorporating.