You’ve come up with a killer business idea; you are itching to get your start-up off the ground as quickly as possible. Thinking about which legal structure to choose won’t be what gets you out of bed in the morning, but it’s important to take some time to think this through.
Decisions you make now can have a big impact on the future, especially where co-founders are concerned. The structure of your business can affect your ability to raise finance, as well as determining legal ownership, entitlement to dividends payments, and liability should the business fail.
One of the first things to decide is whether to register as self-employed and become a sole trader, form a partnership or set up a limited company, or limited liability partnership. For more on what each of these registrations involve, the pros and cons of each and what your respective duties and obligations are, read our e-book “GET READY TO BE YOUR OWN BOSS.
Should you decide to form a limited company (guaranteed by shares), you’ll need to nominate shareholders and directors, decide how many shares to allocate, and how much share capital to put in at the beginning. Here are some guidelines:
Shareholders and Directors
Companies are managed by directors and owned by shareholders (also referred to as ‘members’). You can be a director and a shareholder.
Shares are issued (or allotted) to shareholders to ultimately define their liability should the company fold, and at least one share must be issued from the outset – although variations can be made later down the line. On a day-to-day basis, the number of shares also denotes the shareholders’ entitlement to dividends and votes in shareholder meetings.
Normally, ‘ordinary shares’ are issued by small companies, which will have full rights to dividends, voting at meetings and entitlement to capital should the company fold.
However, the company could also issue ‘preference shares’, which have a fixed right to dividends and no voting rights. In addition, ordinary share capital could be sub-divided into segments denoted by A, B, C etc. This set-up facilitates the payment of dividends at different rates. You may come across this where shares are being issued to employees, for instance, where the company wants to reward its staff with dividends according to their seniority or performance. However, these so-called ‘alphabet shares’ are complex and way beyond the scope of this article.
How many shares should I issue?
Contrary to popular belief, for small companies there isn’t really a recipe to follow when deciding on the share structure.
If you are to be the only director and also the only shareholder, you could simply issue one share to yourself.
Alternatively, you could issue a very large numbers of shares, perhaps to reflect the shareholders’ investments dollar-for-dollar. But the shareholders must actually physically pay for their shares, so this could be costly.
Most commonly, you see one hundred shares issued in small companies. This allows the allocation of the shares to reflect the shareholders’ commitment to/control of the company, while being inexpensive.
If you are unsure about how many shares to issue or the structure, you should seek professional advice from an accountant. Otherwise, you could end up making the share structure unnecessarily complex.
How do I issue shares?
This list only deals with very straightforward share issues; for example, where there are no unusual restrictions in the Articles of Association/Shareholders’ Agreement or Memorandum of Understanding and there is only one type of share being issued.
- Check that the company has sufficient ‘authorised share capital’ to issue the required number of new shares. Authorised share capital is effectively the ‘pot’ from which shares can be issued.
- Check that the directors have authority to issue new shares. This could either exist in the company’s Articles of Association or in an ordinary resolution passed by the shareholders. If no such authority exists, the shareholders must hold a general meeting to pass an ordinary resolution to do so.
- Check that the issue of the shares complies with any pre-emption rights or other restrictions in the Companies Act, Articles of Association, any shareholders’ agreement or Memorandum of Association. Again, if there are any restrictions, you may be able to get them varied by holding a general meeting or with a written resolution.
- Write to or verbally offer the shares to the intended recipients.
- Hold a general meeting or produce a written resolution to approve the issue. If a meeting is held, produce minutes of the meeting and file within the company’s statutory records. If a written resolution is completed, file within the company’s statutory records.
- Upon receipt of acceptances and the payments due from the recipient(s), complete the share certificates and file them in the company’s statutory books. This should be done within two months of the board making the allotment.
- Update the Company’s Register of Allotments and the Register of Shareholders. This should be done within two months of the board making the allotment. If the shares were paid for, or partly paid for, by transferring assets to the company (ie they are paid for other than in cash), you will also need to update your asset register and in the case of real estate or motor vehicles, consider if any duty or taxes that may be payable on the transfer.
Where can I find out the share capital?
The shareholders and the numbers of shares each of them has taken up at the point of formation of the company must be stated in the Articles of Association, any shareholders’ agreement or Memorandum of Association. However, if there have been variations (new issues or transfers), then the best thing to do is check the latest Annual Return, as a full list of members should have been attached.