If you work through a limited company, you’re not the business, even if you’re 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 to 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 how the company is managed and run. And they also entitle you to a cut of the company’s profits.
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 wouldn’t 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 blog post. But it’s 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.
Because limited companies can enter into contracts in their own name, you’re protected. 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’s your company that will get sued and have to pay up.
Of course, limited companies — and other entities, like partnerships, that have legal personalities — can’t act on their own. Ultimately, they’re controlled by their owners.
And that’s where shares come in.
When you form a limited company, it’ll issue shares. And the number of shares you have in your possession reflects:
- How much say you have in the company’s decision-making process
- How much you’ll benefit from its success
- If the company does badly, how much of your personal money you’ll lose
Limited company shares explained
So, what are shares exactly?
In the simplest of terms, shares represent your ownership stake in the company.
Let’s say you’re the sole owner of a limited company.
When you form the company, it issues 100 shares worth £1 each. As you’re 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 and you alone get to make important decisions on behalf of the company.
You’re also entitled to 100% of the company’s profits. So if, in 2021/22, your company makes £100,000 after expenses and corporation tax, you can pay yourself the full £100,000 as a dividend.
The flipside is that, if the company goes bankrupt, you’ll 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’ve paid for your shares — in this case £100 — comes out of your own pocket (unless you’ve broken the law).
Needless to say, if there’s more than one shareholder, your rights and responsibilities would reduce accordingly.
If you owned 75% of the shares, you’d have 75% of the voting rights and be entitled to 75% of the profits. So, using our previous example, you’d get £75,000 of the company’s £100,000 profit.
On the bright side, you’d only be on the hook for £75 if the company went bust.
Similarly, if you only owned 25% of the shares, you’d 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 their age or whether they’re an individual, a partnership, or another limited company.
That said, you should think carefully about giving someone shares in your company if they’re under 18 or not resident in the UK.
People under 18 can’t 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 these issues if one of your shareholders isn’t a 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’s behind your company.
You must also state what rights the shares give each shareholder:
- 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
These are called ‘prescribed particulars’.
How many shares should you start your limited company with?
In theory, you could start a limited company with just one share. But this isn’t practical.
Once a share is issued, you can’t divide it further. So, while having one share representing a 100% ownership stake is fine when you’re the company’s sole owner, it’s a problem if you ever decide you want to bring other shareholders on board. In that case, you’ll have to go through the process and expense of issuing more shares.
With this in mind, it’s 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 in your company should you ever decide to bring a business partner on board.
Historically, companies issued 100 shares because it kept stamp duty to a minimum.
Nowadays, you don’t pay stamp duty on newly issued shares. Or if you’re buying shares that are 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’s easy to work out each shareholder’s entitlement (or liability)
- In private companies — companies where the shares are privately owned and, so, not traded on the stock exchange — shares are typically valued at £1 per share. So 100 shares limits liability to a figure that is realistic for most people
What are the rights and responsibilities of a shareholder in a limited company?
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 from one shareholder to another
- Approving dividend payments
- Selling or closing the company
On the other hand, your main responsibility as a shareholder is to pay for your shares.
It’s worth noting that shareholders don’t get a say in the day-to-day running of the company. That’s up to the directors.
If you run a small business through a limited company, you’ll be both the shareholder and the director, which can confuse things somewhat.
It’s important to bear in mind that the distinction has practical implications. As a rule, you have to document the decisions you take or approve as a shareholder in writing. And in some cases — for example, if you approve issuing more shares — you’ll also need to let Companies House know.
How do you allocate shares?
Not all shares entitle you to the same rights. This depends on the type of share. There are three main types:
These are the most common type — or class — of shares, and they divide the rights and responsibilities we’ve just talked about equally between their holders
As the name suggests, these shares give their holders preferential rights. Typically, this is an attractive fixed percentage of the company’s profit. The trade-off is that holders don’t usually get voting rights
These are a way to give shareholders more power, typically through extra voting rights. For example, one share could give you more than one vote. Or you could sell several ordinary shares as a bundle for a lower price
If you’re the company’s sole owner — or you’re in business with a handful of others — all your company’s shares are most likely ordinary shares.
But, as your business grows, issuing preference shares or management shares can be a handy way of raising more funding or rewarding loyal employees without giving up too much control.
With preference shares, for instance, holders get better returns when the company does well. But they don’t get to have a say in how you run it, because the shares don’t give voting rights.
Similarly, management shares can be useful if you’ve had to give up some control — for example because an important outside investor has insisted on it — and you want to restore the balance of power.
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’re a measure of your decision-making power in the company and your slice of company profits.
And they also represent how much you stand to lose if your company goes bust.
Needless to say, because shares are such a crucial element in a limited company, the rules around them can get quite 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’s why it’s 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.
They can help you decide what types of shares to issue and how to allocate them.
And, most importantly, they can talk you through which decisions you can take as a director and which require you to put your shareholder’s hat on, so you’re always on the right side of the law.