Share Capital and Share Classes

Share capital is the total amount of money a company raises by issuing shares to its shareholders. It represents the permanent investment in the company and forms part of the company’s equity on the balance sheet. Every UK private limited company must have at least one share when it is incorporated.

Key Terminology

Nominal Value

Every share must have a nominal value (also called par value). This is the minimum price at which the share can be issued and is set when the company is incorporated. Common nominal values are £1, £0.01 (1p) or £0.10 (10p).

The nominal value does not reflect the market value of the share. A share with a nominal value of £1 could be worth significantly more (or less) depending on the company’s performance.

Example

A company issues 1,000 shares with a nominal value of £1 each:

Share Premium

When shares are issued at a price above their nominal value, the difference is recorded as a share premium. The share premium account is a non-distributable reserve — it cannot be used to pay dividends.

Example

A company issues 500 shares with a nominal value of £1 each at a price of £5 per share:

Types of Share Classes

Companies can create different classes of shares with different rights. The most common classes are:

Ordinary Shares

The standard class of shares, carrying:

• Voting rights — typically one vote per share
• Dividend rights — entitlement to a share of profits when dividends are declared
• Capital rights — entitlement to a share of assets on winding up (after creditors and preference shareholders)

Most private limited companies have a single class of ordinary shares.

Preference Shares

Shares with preferential rights, typically including:

• Fixed dividend — a set percentage paid before ordinary dividends
• Priority on winding up — capital returned before ordinary shareholders
• Usually non-voting — no vote at general meetings

Preference shares can be cumulative (unpaid dividends accumulate) or non-cumulative (unpaid dividends are lost).

Alphabet Shares

Different classes of ordinary shares (A shares, B shares, C shares, etc.) with varied rights. Alphabet shares are commonly used in family or owner-managed companies to:

• Pay different dividend amounts to different shareholders
• Enable tax-efficient planning for families where shareholders are in different tax bands
• Give different voting rights to different groups

Redeemable Shares

Shares that the company can buy back at a future date at a predetermined price. The company must have non-redeemable shares in issue at all times.

Non-Voting Shares

Shares that carry no voting rights but may have full dividend and capital rights. Often used for employee share schemes or passive investors.

Creating Share Classes

Share classes are defined in the company’s articles of association. To create a new class of shares, the company must:

1. Pass a special resolution (75% majority) to amend the articles
2. File the amended articles and the resolution with Companies House
3. Update the statement of capital to reflect the new class
4. Update the statutory books

Issuing New Shares (Allotment)

When a company issues new shares, the directors must have authority to allot shares. For private companies with one class of shares, the directors have automatic authority under s.550 Companies Act 2006.

For companies with multiple share classes, the directors need authority from the shareholders (by ordinary resolution under s.551).

Pre-Emption Rights

Existing shareholders generally have a right of first refusal when new shares are issued (s.561). This means new shares must be offered to existing shareholders in proportion to their current holdings before being offered to anyone else.

Pre-emption rights can be disapplied by a special resolution (75% majority).

Steps to Issue Shares

1. Check directors have authority to allot
2. Offer shares to existing shareholders under pre-emption rights (or disapply)
3. Pass a board resolution to allot the shares
4. Issue share certificates within 2 months
5. File a return of allotment (form SH01) with Companies House within 1 month
6. Update the register of members and statement of capital

Share Capital in the Accounts

Share capital appears in the equity section of the balance sheet:

Accounting Entries for Share Issue

Share capital and share premium are non-distributable — they cannot be returned to shareholders as dividends. They can only be reduced by following the formal capital reduction procedures under the Companies Act 2006.

Statement of Capital

Every time shares are issued or the share structure changes, the company must file an updated statement of capital with Companies House. The statement shows:

• The total number of shares of each class
• The aggregate nominal value of each class
• The prescribed particulars of each class (voting rights, dividend rights, capital rights)
• The amount paid up and amount unpaid on each share

The statement of capital is also confirmed as part of the annual confirmation statement.

Minimum Share Capital