What is Share Capital of a UK company How Does it Work?

Ryan Patrick

Feb 12, 2024 • 5 min read

If you're interested or have a limited company in the UK, you need to understand share capital. It gives rights to shareholders, and in case of alterations, regulations must be followed. Managing share capital effectively by creating different shares may motivate staff and attract potential investors. Here is the ultimate share capital guide that will help you share capital management in your company.

Share capital is the money provided by a limited company's members in exchange for company shares. That means share capital is the money invested in a business, the nominal value of shares issued. For example

If a company issues 5 shares at £1 (nominal value of share), the total share capital is £1.
If a company issues 30 shares at £5 each, it means the total share capital is £150

The share capital dictates profit entitlement, financial liability, and company shareholders' decision-making power.

These are the maximum number of shares a business can issue. However, this restriction was no longer applicable after Companies ACT 2006 came into action. So, every company incorporated after 1st Oct 2009 doesn't have this restriction unless a provision includes the business articles of association.

This is the total nominal value of shares issued by the business. The actual value may differ based on the company's worthwhile selling shares. The nominal value is at £1 for each share but can be set at any sum. The nominal value of unpaid shares represents a member's financial liability. Each member must contribute the nominal value of the outstanding shares if the company is wound up or unable to pay the bill or if the business demands payments.

For example:

In case a limited company issues a single share, it signifies complete ownership of the business since that one share represents 100% ownership. When the company has one share, the member holding the share becomes the sole owner. That person acts as a shareholder and director, which happens when you establish a company independently.
If the company issues two shares, it may have two or one owner. Each share may represent 50% of the company or 60% and 40% if one individual contributed more capital to the company. One member can purchase both shares and own the company 100%.
When 100 shares are issued, every share will be worth 1% of the company since it can have one to 100 shareholders. However, one member can buy all the shares and own the company, intending to sell later. On the other hand, a few people can buy the shares, resulting in each individual holding a certain percentage of the business, for example, 30%, 40%, and 30%.

Different Classes of Limited Company Shares

Share class means the type of a company share. Remember, other share classes have their rights and conditions, which you will find in the company's articles of association. Despite having many classes of shares, the majority of limited companies issue ordinary shares.

Ordinary share is the standard class that gives members:

Equal voting rights
Profit entitlement
Capital rights

Issuing ordinary shares makes things simple; that's why it's the most popular share type used in the UK. However, this class is not suitable for all businesses. That's why a company can create additional classes after formation to offer different powers and rights to members. Here are other share classes limited companies can use

Preference Shares

This type of share is where the shareholders have preferential rights and get dividends from business profits. Preference shares have no voting rights, and in case of company liquidation, they are not entitled to surplus capital beyond the predetermined dividend amount.

Non-voting Shares

Non-voting shares are limited shares that may provide you with dividend payments but will have no voting decisions. These shares are issued to employees since they offer company tax-saving benefits. These shares are issued to family members of the company shareholders.

Redeemable Shares

These types of shares are issued with an agreement the business can redeem them after a specific time or upon request of a shareholder based on articles of association. Redeemable shares are granted to employees with the condition that they will be repurchased at their nominal value when they leave the company.

Other Types of Shares

Management shares: this category holds the privilege of having multiple votes per share or a nominal value lower than other classes. These shares are mainly allocated to subscribers, the initial owners who joined the business during incorporation. The allocation allows them greater control over the company than members who join later.
Deferred ordinary shares: this type grants dividend payments after all other types have been paid.
Alphabet shares: these are shares categorised according to various classes, such as A ordinary, B ordinary, etc. Creating these classes intends to modify the percentage of each ordinary share category. For example, a business with two members may possess
1st member: 50% voting rights, 80% capital rights and 50% dividends rights
2nd member: 50% voting rights, 20% capital rights and 50%dividend rights

Shareholders must agree to the creation of new share classes. To authorise the issuance of new shares, shareholders must pass a resolution through a written consent or general meeting. However, in some companies, directors vest such decisions according to the companies' articles of association provisions.

The nominal value of shares is the minimum value for a specific class of shares issued by a business. Its value is determined by dividing the company's total paid-up share capital by the total outstanding shares at any given time.

It's a requirement for each share class to have a predefined nominal value per share, such as £1. Even if the company faces insolvency, a shareholder's maximum financial obligation to the company is limited to the initial investment, representing the nominal value of their shares. Remember, the market value of the shares, which might exceed the nominal value, is distinct from the value indicated on the share certificates.

Shareholders cannot request share capital return because it belongs to the company and not them individually. Hence, it's the responsibility of company directors to maintain the business's share capital. Additionally, modifying a company's share capital can involve various procedures. Given the potential intricacies of this process, it is highly advisable to enlist the help of a specialist for guidance.

It's possible to increase share capital in a UK-limited company at the shareholders' discretion. Companies House accepts applications for these modifications through the postal service or website. You must complete the Companies House form SH01 to document the share capital increase. Although you can submit this form differently, online is the ideal alternative.

Do You Need Help Forming Your Company in the UK?

Incorpuk offers a range of fast and efficient online company formation services that makes it easiest and cost effective to take your business global. Kindly contact incorpuk if you need any help on company formation services today.

Conclusion

Understanding share capital is crucial for everyone willing to start or have a limited company in the UK. Share capital refers to the money members invest in a business in exchange for shares, responsibilities, and dictating rights. There are various classes of shares, such as ordinary, preference, and redeemable. Although you cannot request share capital return as a shareholder, it's possible to increase with the shareholder's approval. All you need is to fill out Companies House form SH01. Would you like specialist guidance in opening a limited company in the UK? Contact Incorpuk today and open your company easily and at an affordable price.

What's Share Capital?

Authorised Share Capital Explained

What's Issued Share Capital?