There are lots of different types of company structures in the UK but by far the most common is the Private Company Limited by Shares (or Ltd. company).
These companies are owned by their share holders who each take a proportion of the company. The shares come with voting rights (normally 1 vote = 1 share) and although they can be sold in a private deal the shares cannot be publicly traded.
So far so straight forward. The complicated bit comes when we look at what these shares actually are. Before the 2006 Companies Act all new companies had to have an authorised share capital. This was the real amount of money which their shares were worth. Since 2006 the link between share value and company value has become largely theoretical.
All Private Companies Limited by Shares have to have shares created as part of the company formation process. However because these shares don’t really need to tie into anything else it is common to simply create a nominal number of shares e.g. 100 shares at a nominal value such as £1 each. If the company is owned by more than one person then these 100 shares can be split among them. Shares cannot be given away or offered at a discount but they can be distributed without being fully paid for. In practice though, if you are splitting 100 shares at £1 each between 4 people then it is easier just to pay your £25.
The normal system for people to invest in small companies is for them to give a sum of money in exchange for a proportion of the shares. So if someone is investing £10,000 for a quarter share of the company they would receive 25 of our 100 shares. However we set out imaginary company up with a nominal or par share value of £1. 25 x £1 obviously does not make £10,000. The solution for this is simply for the individual involved to pay over par for the shares. They acknowledge that they are buying £25 worth of shares but they choose to pay £10,000 for them. The actual amount they have paid will be recorded in the company accounts and, hopefully, reflected in the dividends they receive from the company. It is easier to do things this way because it allows flexibility in the number of shares given away. They do not have to match a numeric value. This can be useful if you take on more investors later in the company’s life when the whole company may be worth double what it was when the original £10,000 was invested. Trying to match numbers of shares to share price at this point is likely to become complicated. It is also normal in many small businesses for some of the people to receive a proportion of the shares based on the work they are going to do or the contacts they will bring with them. Again trying to put an accurate monetary value on this can be very difficult. In most cases then it is easier to use a round number of shares and deal with them at nominal face values. In this way share ownership of the company can almost be separated from monetary investment.
We said earlier that the link between company shares and company value is largely theoretical. This is true as long as the company operates normally. However if the company becomes insolvent at any point then the link between share value and company value can become very real. If the directors of a company allow it to become insolvent then the shareholders are liable to pay the amount their shares are worth towards covering any company debts. If you only started the company with 100 shares at £1 then the maximum the share holders will have to cover in the event of insolvency is £100. This is one of the big advantages of using nominal share values.
If you want to find out more about setting up companies or the legal process of assigning shares then please get in touch with us.