Private Companies Limited By Shares

A Basic Summary

The overwhelming majority of UK companies are private companies limited by shares.

Since their introduction in 1855, as explained above, the principal advantage of private companies limited by shares has been that they are a separate legal person and the liability of the shareholders for what the company does is limited to the amount they have paid (or have yet to pay) for their shares.

The reason that this type of company is termed a ‘private’ company is to distinguish it from a ‘public’ company. Only public companies can offer their shares to the general investing public. For this advantage their shareholders must suffer much more regulation, and there is a high minimum investment threshold before the company can start trading. In most circumstances, it is illegal for a private company to offer its shares for sale to the general investing public.

The ‘typical’ small private company limited by shares will have:

• Two directors who are responsible for the management of the company.
• A company secretary, who is responsible for the administration of the company and compliance with statutory filing and notification requirements. The company secretary may be one of the directors.
• An ‘authorised’ or ‘nominal’ maximum share capital of £1000 divided into 1000 shares with a ‘par’ value of £1 each. Of these, usually only two shares are issued (the ‘subscriber’ shares, sold by the company to the founders at the time the company is formed). Shares can be issued at more than their ‘par’ value (‘issuing at a premium’), allowing the company to raise large sums although small numbers of shares have been issued.
• A registered office in England and Wales.

The Concept of Shares

Over the centuries lawyers have discovered that by creating different types of shares companies with a share capital (private companies limited by shares and public companies limited by shares) can be used flexibly for many different purposes.

This is because shares are really bundles of rights in a company. What these rights (and obligations) are will depend on the particular type (or ‘class’) of share.

Most shares allow their holders to receive a share of the profits of the company, but this is not always the case. Shares give the right to receive some ‘share’ of the value that is created by the company from the sale of the share and/or some ‘share’ in the management of the company.

To discover what rights any particular share carries we must look at the company’s ‘constitution’, its Memorandum and Articles of Association – noting that, where no different or separate rights are said to belong to different classes of shares, they are treated as equals.

It is impossible to give a definitive list of different types of shares because, with a few caveats, a company can issue new shares with any rights and obligations that the then shareholders can imagine. The usual differences are in respect of voting rights, right to dividend, return of capital in a winding-up of the company, and transferability.

Capital is the nominal value of the shares (the £1 in ‘£1 shares’) and shares will either be fully paid up, partly paid or ‘due’, depending on how much of the capital money has been paid to the company.

The different types of shares are often divided into the following categories:

Ordinary Shares

Every company has ordinary shares (‘Class A’ shares). If there is only one class of shares they will be ordinary shares. The ordinary share is that which the public associates with ‘equity’. These shares usually carry a proportionate entitlement to the dividends of the company, to vote at General Meetings, and to share in any surplus in a winding-up of the company.

Ordinary shareholders usually receive a dividend from their shares, and/or a return of capital on a winding-up. However, they are not necessarily entitled to this. For example, the directors recommend to the Annual General Meeting that a dividend be paid, and shareholders can then vote themselves a dividend up to, but not exceeding, that sum. Nevertheless, the directors need not declare a dividend, even if there are sufficient profits available.

Preference Shares

In contrast to ordinary shareholders, preference shareholders will be given some form of preferential treatment. They are usually entitled to a fixed rate of dividend from the company’s distributable profits, in ‘preference’ (i.e. before) anything is paid to the ordinary shareholders. In addition, preference shareholders usually receive some form of preferential repayment of capital in a winding-up.

Preference shares are usually subdivided as follows:

• Participating preference shares: In addition to their preferential right, such as to a dividend, these also have the right to share in any surplus profits available after dividends have been paid to both preference and ordinary shareholders.
• Cumulative preference shares: These provide the right to an accumulated dividend. If the preferential dividend is not fully paid one year because the company has insufficient profits, that year’s entitlement to dividend is carried forward so that the next year all arrears of preferential dividend must be paid before other shareholders get anything.

Redeemable Shares

Shares of any class can be redeemable. This means that the shares will be ‘bought back’ by the company on whatever terms are specified by the Articles (the ‘rules’ of the company). They can then be cancelled.

Convertible Shares

Any class of share may be ‘convertible’ if the Articles of the company allow the shareholder to convert it into shares of another class. Obviously the exercise of this conversion right can dramatically change the balance of power amongst shareholders.

Forming A Private Company Limited By Shares

If you have decided to form a private company limited by shares then there are a number of things that you must decide in order to allow us to form the company to your exact requirements.

You can either consider these yourself or discuss some or all of them with us when you come to see us. So it does not matter if you are not sure at the moment what you require; we are very happy to discuss that with you and guide you through the process.

Please click here to see the things to decide or discuss with us.