How limited company shares work: shareholders, rights and responsibilities

If you work through a limited company, you are not the business, even if you are the company’s sole owner. But how do shares work, who can be a shareholder, and what are your rights and responsibilities?

Limited companies have a separate legal personality. So clients, business assets, and revenue belong to the company, not you.

That said, as the company’s owner — or part owner, if you have business partners — you get to be a shareholder. Your shares give you a say in managing and running the company. And they also entitle you to a cut of the company’s profits.

What’s in this guide?

• What does ‘separate legal personality’ mean?
• Limited company shares explained
• Who can be a shareholder in a limited company?
• How many shares should you start your limited company with?
• What are the rights and responsibilities of a shareholder?
• What are pre-emptive rights?
• How do you allocate shares?
• Understanding how shares work is essential

What does ‘separate legal personality’ mean?

As the name suggests, legal personality is a legal fiction that gives organisations similar rights and responsibilities to those enjoyed by humans. Entities with legal personality:

• Exist independently of the people who have founded them and own them. So, if you were to pass away, for example, your company would not die with you. It would continue to exist until your heirs decided to close it down.
• Can have their own goals and objectives. And sometimes these might be at odds with yours. Conflicts of interest in corporate settings deserve their own lengthy guide. It is worth knowing that there are rules around them and that breaking them could land you in legal hot water.
• Have legal rights and responsibilities that are separate from those of their owners. In particular, legal persons can enter into contracts, borrow money, and pay and get paid.

The third point is one of the main advantages of doing business as a limited company.

You are protected because limited companies can enter into contracts in their own name. Your clients’ and suppliers’ legal relationship is with your company, not with you. So if there are disagreements — or you run into financial difficulties — it is your company that will get sued and have to pay up.

Of course, limited companies — and other entities, like partnerships, that have legal personalities — cannot act on their own. Ultimately, they are controlled by their owners.

And that is where shares come in.

Limited company shares explained

When you form a limited company, it will issue shares. The number of shares you have reflects:

• How much say you have in the company’s decision making
• How much you will benefit from its success
• If the company does badly, how much of your personal money you will lose

In simple terms, shares represent your ownership stake in the company.

Let’s say you are the sole owner of a limited company. When you form the company, it issues 100 shares worth £1 each. As you are the sole owner, you buy them all and pay £100 in total.

Because you own all the shares in the company, you have 100% of the voting rights. In other words, you alone get to make important decisions on behalf of the company.

You are also entitled to 100% of the company’s profits. So if, in 2024/25, your company makes £100,000 after expenses and Corporation Tax, you can pay yourself the full £100,000 as a dividend.

However, if the company goes bankrupt, you will lose the £100 you paid for your shares.

This is why companies are said to have limited liability. If the worst happens and your company ends up owing thousands of pounds to suppliers, only the amount you have paid for your shares — in this case £100 — comes out of your own pocket (unless you have broken the law).

Needless to say, if there is more than one shareholder, your rights and responsibilities reduce accordingly.

If you owned 75% of the shares, you would have 75% of the voting rights and be entitled to 75% of the profits. Using our example, you would get £75,000 of the company’s £100,000 profit. On the bright side, you would only be on the hook for £75 if the company went bust.

Similarly, if you owned 25% of the shares, you would have 25% voting rights, get £25,000 profit, and lose £25 should the company fail.

Who can be a shareholder in a limited company?

Anyone can be a shareholder in a limited company, regardless of age or whether they are an individual, a partnership, or another limited company.

That said, think carefully about giving someone shares if they are under 18 or not resident in the UK.

People under 18 cannot legally enter into contracts. Which means you could run into issues when trying to open a business bank account or signing deals with clients.

You could also run into issues if a shareholder is not UK resident, because immigration rules may prohibit them from doing business in the UK.

You must register the name and address of every shareholder with Companies House. This is because limited liability comes with a trade off — the people you do business with have a right to know who is behind your company.

You must also state what rights the shares give each shareholder. These are called prescribed particulars and typically cover:

• What share of dividends they get
• Whether they can exchange their shares for money
• Whether they can vote on certain company matters
• How many votes they get

How many shares should you start your limited company with?

In theory, you could start a limited company with just one share. But this is not practical.

Once a share is issued, you cannot divide it further. So, while having one share representing a 100% ownership stake is fine when you are the sole owner, it is a problem if you ever decide to bring other shareholders on board. You would need to go through the process and expense of issuing more shares.

With this in mind, it is best to issue several shares when you form the company, ideally in an even number. This makes it easy to hand over an ownership stake should you bring in a business partner.

Historically, companies issued 100 shares because it kept stamp duty to a minimum. Nowadays, you do not pay stamp duty on newly issued shares, or if you are buying shares worth less than £1,000. But 100 is still a good number of shares — and the most common amount issued — for the following reasons:

• In an issue of 100 shares, one share represents 1% ownership, so it is easy to work out each shareholder’s entitlement or liability
• In private companies (where shares are not traded on a stock exchange) shares are typically valued at £1 per share, so 100 shares limits liability to a realistic figure for most people

What are the rights and responsibilities of a shareholder?

Alongside voting rights and a share of the profits, shareholders also get a say in major decisions, such as:

• Naming the company
• The company’s management structure, including appointing and removing directors
• Deciding what powers directors should have
• Approving large investments
• Changing the prescribed particulars of shares
• Approving the issue of more shares or transfers of shares
• Approving dividend payments
• Selling or closing the company

Your main responsibility as a shareholder is to pay for your shares.

Shareholders do not get a say in the day to day running of the company. That is up to the directors.

If you run a small business through a limited company, you will often be both shareholder and director, which can be confusing. The distinction matters. As a rule, you must document the decisions you take or approve as a shareholder in writing. In some cases, for example if you approve issuing more shares, you will also need to notify Companies House.

What are pre-emptive rights?

Pre-emptive rights (or rights of pre-emption) protect existing shareholders from having their ownership diluted when a company issues new shares. In simple terms, they give current shareholders first refusal on any new shares, in proportion to their existing holding. So, if you own 25% of a company’s shares, you should be offered 25% of any new share issue before it is made available to outside investors.

These rights can arise in three ways:

• Statutory rights under the Companies Act 2006
• Provisions written into the company’s articles of association
• Clauses in a shareholders’ agreement

Statutory pre-emptive rights are set out in sections 561 to 576 of the Companies Act. They require new shares to be offered to existing shareholders first, in writing, with at least 21 days allowed for a response. These rights do not apply if the company’s articles exclude them, if the shares are issued for non cash consideration, if a special resolution disapplies them, or if the shares are part of an employee share scheme.

Contractors who run one person companies are unlikely to need to worry about pre-emptive rights. But if you take on business partners, or issue shares to family members, these rules help protect your stake in the company from being watered down.

How do you allocate shares?

Not all shares entitle you to the same rights. This depends on the type or class of share. The main classes you will see in small private companies are:

Ordinary shares

The most common class. Ordinary shares usually carry voting rights and an equal right to dividends and capital.

Preference shares

These give preferential rights, typically a fixed dividend that is paid before any dividend on ordinary shares. The trade off is that preference shares usually do not carry voting rights.

Management shares

A way to give particular shareholders more control, typically by attaching extra voting rights to the class. For example, one share might carry multiple votes.

If you are the company’s sole owner — or you are in business with a handful of others — all your company’s shares are most likely ordinary shares. As your business grows, issuing preference or management shares can be a way to raise funding or reward key people without giving up too much control.

Understanding how shares work is essential if you run a limited company

As a limited company owner, your shares represent how much skin you have in the game. They are a measure of your decision making power and your slice of company profits. They also represent how much you stand to lose if your company goes bust.

Because shares are such a crucial element in a limited company, the rules around them can get complex. And because most small limited company owners (such as contractors) tend to be both shareholders and directors, the lines can also get blurry.

That is why it is crucial to build a relationship with an accountant you trust. Your accountant can advise you on how many shares to issue when you create your company, what classes to use, and how to document shareholder decisions correctly.