All limited companies are required to issue a minimum of one whole share during the company formation process. This share is owned by a shareholder.
There are different types of shares that can be issued by a company, here we take a look at the different classes of shares and why you may want to use them.
What are company shares?
Simply put, shares are pieces of the company. If you have more than one shareholder when you register your company, each person must be issued at least one whole share.
If a company has just one share, then the owner of that share owns 100% of the company. If the company has two shares owned by separate people, then each shareholder owns 50% of the company.
In most cases, limited companies will issue ‘Ordinary A shares’ when setting up the company. Owning one of these shares will allow a shareholder rights to vote and to receive dividends, as well as receiving distributions upon the closure of the company.
Investors in ordinary shares are usually given one vote for each share they hold. This means that if one shareholder owns over 50% of the company shares, then they will have more votes at annual meetings and be entitled to more of the dividends than the other shareholders.
If a company owner wishes to add additional shareholders without any voting rights or without the same rights to dividends, this can be done by issuing Alphabet Shares.
What are alphabet shares?
Alphabet Shares, or ABC Shares, is the term used to describe the different classes of shares often set up as ‘A’ shares, ‘B’ shares, ‘C’ shares etc.
These are shares that are distinguished in some way from ordinary shares of the same company.
When more than one class of share exists, companies usually designate them as Class A and Class B and so on.
It is important to ensure that the company’s Articles of Association are amended via a special resolution of the shareholders to specify the rights attached to each class of share. If you do not identify what rights are attached to each different class of share, they will all rank equally.
Reasons to use alphabet shares
Company owners may want to pay different rates of dividends to some shareholders. The Alphabet share structure allows for this flexibility as dividends are paid according to the class of the share.
Alphabet shares are often used in family companies or joint ventures to give certain shareholders the power to make important decisions, for example to appoint a director.
As an example, if a married couple own a company together with each person holding one Ordinary A share, and they want to declare a company dividend of £100,000, each person will receive £50,000 and will pay the relevant personal income tax.
However, if one of the couple owned one A share and the other owned one B share, then different dividend amounts can be paid to each person. The owner of the A share could be paid £40,000 and the owner of the B share could be paid £60,000.
Company owners can also decide that one class of share does not have voting rights. For example, in the situation above, if the B share was a non-voting share, the owner of the A share would have full control of the company. This allows a company to pay dividends to shareholders but not allow them to vote.
How do you set up alphabet shares?
If you want to set up an alphabet share structure for your company, this involves:
- The limited company creating a new class or classes of shares
- Amending the company’s Articles of Association to identify the new classes of shares
- Directors and shareholders considering and approving all changes to the company’s Articles of Association
- The new articles detailing the new share classes being adopted by special resolution
- Deciding whether to allot new shares or have existing shares converted to the new classes
- Sending notices of the statutory forms and resolutions to Companies House
If new shares have been allotted you must also follow the procedure laid out in the Companies Act 2006 which involves:
- Holding a board meeting to approve the decision to allot new shares
- Keeping minutes from the board meeting
- Issuing share certificates
- Completing a return of allotment on Companies House Form SH01
- Updating the company’s register
We would always recommend seeking professional advice before implementing a new share scheme within your company. If you have any questions feel free to get in touch with us here at Wizz Accounting.