Setting up a private company limited by shares is one of the most common ways to start a business or expand a business into the UK. However, the law relating to shares in the UK and share capital can be complicated, so it is important to understand your options when it comes to initial share issue. The right number of shares initially issued to shareholders will depend on your specific circumstances, and this post looks at some of the main things you may wish to consider when deciding how many shares are right for your circumstances.
What is the purpose of initial share issue?
The purpose of issuing shares at the beginning of the company, is to raise capital. For example, if three people wish to start a company, investing £10,000 each at the outset, the simplest way for this to be represented is for the company to issue £30,000 shares at £1 each. However, this is not the only method of raising money for the company.
Alternatively, the company may issue only 3 shares at £1 each, and the company founders can lend the £10,000 each to the company. Under each of these circumstances, each shareholder owns one third of the company, and they will have the same voting rights and powers within the company. For many businesses, both methods are suitable. But, there are certain legal, practical and taxation issues which may make one method preferable over the other.
When the £30,000 is locked into the company as share capital, it is more difficult to get this money back out of the company in comparison to when the company is given a loan. Where a company is loaned the money from the shareholders, the money may be repaid at any time. Furthermore, if the company becomes insolvent, the shareholders may claim the money lent as creditors in any insolvency proceedings. However, share capital is important when the company is seeking finance from lenders, investors and other business contacts. In particular, banks wish to see that share capital is ‘locked in’ to the company, and that it has substance.
There are many things to consider in relation to share issue when setting up a UK company. To get it right and make sure you do the best for the specific circumstances of your company, get in touch with our experts today for advice.