How Does A Company Issue Shares?

When it comes to getting finance, one of the most popular options is to issue shares. This could be offered to employees, investors or other third parties. 

It’s a great investment, and also works as a great incentive since employees are being given the opportunity to have ownership in the company. 

However, if your company is looking to issue shares, it’s important that you understand how the process works, what the law says about it and the kinds of documents you’ll need to ensure you are compliant. 

What Is A Company?

A company is a legal entity on its own that operates as a business. This is different to a sole trader or a partnership, both of which have unlimited liability. A company, on the other hand, has limited liability. 

This means that the business acts as its own person and any debts that it owes does not affect the directors’ personal assets. So, a company can own property, sell property, enter into contracts and incur debts. 

Generally, there are private companies also known as proprietary companies and public companies. Proprietary companies can have structures that are both limited by shares and unlimited. Therefore, much of what will be discussed below may differ depending on the company type you are inquiring about. 

What Are Shares? 

Shares essentially give you ownership of the company. If you hold shares, you are a shareholder and ‘own’ part of the company. 

Usually, companies will have multiple shareholders as a way of getting finance in their early stages, and the ownership of the company is the incentive that is intended to appeal to investors and other parties should the company thrive later down the track. 

What Are Ordinary Shares?

The most common type of shares are ordinary shares. As the name suggests, they are standard shares with no special rights attached to it. As such, they are allocated after preference shares.

Put simply, ordinary shares entitle all shareholders to the same set of rights. Due to their simple nature, many businesses will allocate ordinary shares right after incorporating the company.

Who Can Be A Shareholder?

Generally speaking, anyone can hold shares in a company.  

However, rules around who can be a shareholder are subject to your Company Articles of Association. Each company is different, so make sure you carefully review your governing documents. 

Can A Director Be A Shareholder?

As a distinction, a shareholder is someone who owns a percentage of the company. A director, on the other hand, manages the operations of that company. A director can own shares in the company they work for, but this will largely depend on the company’s Articles. 

If the Articles has nothing in it which limits the director from being a shareholder, a director can purchase shares in the company. On the flip side, it is not necessary that a director must own shares in a company to act as the director. 

What Is A Shareholders Agreement?

A Shareholders Agreement is the legally binding contract between the shareholder and the company confirming the shareholders’ ownership of a particular percentage of the company. 

In addition to this, a shareholders agreement addresses what happens when a shareholder wants to leave the company, what happens if conflict arises and other important matters. 

When a company issues shares, it’s important that they understand the ins and outs of Shareholders Agreements in case things get messy later on. 

Do I Need To Notify Existing Shareholders When I Issue New Shares?

Under business laws, a company must offer any new shares to their existing shareholders before anyone else. 

However, if the company has a shareholders agreement states otherwise, then the rules may differ. Overall, it depends on the company and their operational structure. 

Why Do Companies Issue Shares?

Issuing shares brings more money into the company. When issuing shares, an opportunity for more shareholders is created allowing them to purchase a percentage of ownership into the company. 

Overall, it’s a valuable exchange and an effective way to get finance in your early business stages. 

How Does A Company Issue Shares?

Companies can issue shares according to the internal rules of their company. This is usually found in the company constitution or a shareholders agreement. Once it has been decided how to issue shares, capital will need to be assessed. 

The point of issuing shares is to bring more revenue into the company, therefore having a target number is key. Once the company has settled on this, a Term Sheet is a great way to ensure all the information is in one place and everybody involved has agreed to it. 

Final details and negotiations can be brought up around the term sheet. Once everything is agreed upon, the parties will likely move forward with a formal agreement to lock in the shares and capital.  

Finally, the application will need to be shared and the company should notify Companies House of the changes made to the company. 

Do Shareholders Need To Pay Tax? 

Any dividends that are a result of shares are considered income. Therefore, tax can be charged on money earned from being a shareholder. If paying taxes for shares seems like something you would like to decrease, then you could consider looking into holding shares through a trust. 

Do I Need To Notify Companies House?

Usually, Companies House needs to be notified of any changes happening within your company. For example, if you want to change your contact address, you need to notify them, and they will then notify HM Revenue and Customs (HMRC). 

It’s always best to consult a legal professional to ensure your business does not incur any fines for not following the proper guidelines. 

Key Takeaways 

• A company will issue shares to bring more money into the company. 
• Anyone can be a shareholder, however this is subject to the company Articles
• There is a legal process to issuing shares that needs to be regarded and applied thoroughly to avoid potential legal troubles. 
• When making changes to your company, be sure to update Companies House using the correct process

Need Help Issuing Shares?

Issuing shares is a productive way to bring more money into your company. However, there are a lot of factors to consider such as company Articles, Companies House regulations, term sheets and shareholder agreements at the very least. 

In order to ensure you get everything right, talking to our lawyers about your next steps is a great way to make sure your business is headed for success. 

If you would like a consultation on your options going forward, you can reach us at 08081347754 or [email protected] for a free, no-obligations chat.

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