Different Share Classes Made Simple: A Practical Guide for Company Directors
Most new companies begin with a single class of ‘ordinary’ shares. These shares give equal voting and dividend rights to all shareholders. The standard approach however might not meet your business needs as your company expands.
Your company faces no strict limits on the number of share classes it can have. Different share classes offer tremendous flexibility when you structure your business ownership. You can bring in new investors while retaining control of voting rights. You can distribute dividends in a flexible way. Tax planning becomes more efficient, especially when you have dividends that don’t require National Insurance contributions. This makes dividends more economical than salaries.
Setting up the right share structure needs careful planning. The process requires clear dividend goals, expert legal and tax advice, and changes to your company’s articles of association. Your arrangements need regular reviews to stay compliant with UK company law and HMRC requirements as your business grows.
This article explains about different share classes in simple terms. You won’t find complex jargon or unnecessary complications here.
Why Use Different Share Classes
Business leaders choose different share classes to tackle specific challenges that a single-class structure doesn’t handle well. The two key elements different share classes enable is strategic control and return on investment.
Strategic control is key to business owners particularly founders or majority shareholders. Different classes set up with different voting rights can ensure that the control in the company remains with the correct parties.
Companies make use of multiple share classes as powerful tools to attract investment. In terms of return on investment, companies can offer investors priority on dividend payments or capital distribution during liquidation by creating preference shares.
Multiple share classes also give companies flexibility to:
- Provide flexibility in terms of how the shareholders pay themselves in dividends
- Create redeemable shares that give investors a predetermined exit strategy
- Set different liquidation preferences that determine payment order during exits
- Help promote staff loyalty and retention in terms of letting employees benefit financially from company growth without affecting management control by use of non-voting shares usually via a share option scheme.
The right share structure becomes a vital strategic asset as your company grows. It’s much more than just paperwork.
Designing a Share Structure That Works
A well-planned share structure needs careful planning and a solid grasp of the legal framework. The bedrock of any share structure has three basic rights: voting rights, dividend rights, and rights to capital during liquidation or winding up.
Questions you should ask yourself:
- Are you a business owner where control is key?
- How much voice are you willing to give to others?
- Do you simply need flexibility in how you pay yourselves?
- Should someone get priority in terms of a sale because for example they invested or loaned a substantial amount of money?
- Or is it a mix of all of the above?
Here at WCL we will ask you a series of questions to get to grips with what is needed at the particular point in your company’s journey. We can then fit the structure to suit you.
Once we know what is needed, we can then sort out the paperwork. You will need to update your company’s articles of association to record the rights attaching to the relevant shares. We’ll ensure this is done together with the relevant filing requirements at Companies House.
We can also advise if you should consider a shareholder agreement as well. You might not want everything in the public domain!
Do remember, your share structure should grow with your business. What works at startup might need changes as you seek investment, reward employees, or plan for succession. Again, we can work with you to review and update your requirements when the time is right.
Matters to be aware of:
- Dividends are a tax efficient way to extract funds from the company, however, you need to work closely with your company accountant to ensure that there are sufficient distributable profits to pay yourselves.
- Gifting shares is potentially problematic from a tax perspective, please always seek tax advice in advance.
- Employee shares are a great idea. Option schemes tend to be a tax efficient way of providing shares to employees, but don’t always suit. There are also reporting requirements with HMRC for employee held shares.
Conclusion
Different share classes give you amazing flexibility as a company director. This piece shows how smart use of varied share classes helps you keep control while getting investors on board. You can distribute profits fairly among stakeholders and create incentives that work for the core team.
The right share structure becomes a powerful tool to reach your business goals. This applies whether you run a family business looking for tax-efficient profit sharing or a startup getting ready for investment rounds. In spite of that, this flexibility brings responsibilities – you need to follow Companies House requirements and HMRC regulations.
Your business growth means you should review your share structure regularly. What fits during startup might need changes as you scale up, welcome new shareholders, or plan succession. On top of that, tax laws change often and can affect how well your current setup works.
Please contact us here are WCL to discuss your needs from both an accountancy and legal perspective.
