How many shares should a new company issue? It’s a frequently asked and, on the face of it, a simple question. Although there are several common models of share ownership in newly formed companies, there’s no simple or right answer on how many new shares to allot.
In this article, which is part of our series looking at shares issue, we’ll look at the Companies Act rules on how many shares a company must have, a number of new company scenarios and some of the things you’ll want to consider when deciding how many shares to issue. Given the number of different factors to consider, you might consider taking specific advice from your accountant or other professional adviser if you’re at all unsure how best to proceed.
On company formation, at least one share must be issued. This share will usually be allotted to a person – the most common example being a company where there is a single director who is also the sole shareholder. However, the share could instead be issued to another corporate body. You will often find a holding company owning the single share in a subsidiary company, for example. It’s also possible for a single share to be allotted to a joint shareholder – where two or more people hold the share jointly.
There are specific rules which apply to a public limited company, which must have at least £50,000 nominal value of issued share capital. So, for example, if the nominal value of each ordinary share in a public limited company is £1.00, the company would need to issue at least 50,000 shares before it could trade or borrow money. If the nominal value per share was instead £0.01, then at least 5,000,000 shares would need to be issued in order for £50,000 of nominal value to be allotted. We’ll cover more of the mechanics of how much can and should be paid for shares in a future article.
For most companies, there won’t be a maximum number of shares they can issue. However, if the company’s Articles of Association specify a maximum authorised share capital, this will act as an upper limit on the shares that can be allotted both at company formation and later. If a proposed allotment of shares would increase the company’s issued share capital beyond the amount of authorised share capital, the limit must either be removed or increased for the allotment to go ahead. Check your Articles of Association if you’re unsure whether this applies to your company.
Larger companies, which may well require more capital to fund the business, are likely to issue more shares than smaller companies. Although both investors and directors often make loans to the company, it’s more common to find shares issued to match their investments: we’ll cover the concept of share premium, whereby shareholders pay an amount greater than the nominal value of the shares issued, in a future article.
The question of how many shares to issue is often most contentious for small and medium sized companies where between two and five shareholders are involved. Although individual circumstances are most important, there are common advantages to issuing few shares or instead allotting many shares. We’ll consider an example of a new company with three shareholders looking to take an equal initial shareholding.
At one extreme, each of the three members of the company could be allotted one share each. The benefits are:
- It should be simpler for everyone to understand with fewer shares in issue.
- A small number of allotted shares may make it easier to manage.
- If just a few shares are issued at nominal value, the initial cash required from shareholders is limited.
In practice, this approach is most usually followed where there is no need to raise funds for use by the business and there’s little possibility of shares being transferred from the initial shareholders or new shares being issued. If funds are required for the business, it’s still possible for only a few shares to be issued, but each could be allotted for an amount in excess of the nominal or par value. Alternatively, funds could be provided in the form of loans to the company.
At the other end of the spectrum, a company could allot hundreds or even thousands of shares to each of the three proposed shareholders. This approach will also have some benefits:
- The main benefit is flexibility. With, say, 100 shares each, there’s greater flexibility if one of the shareholders wishes to sell part but not all of their holding to one of the other existing shareholders or to someone else. So they could sell a proportion of their 100 shares while retaining the rest. If, instead, they just had one share, their options are far more limited!
- This flexibility may also be useful when the company chooses to allot more shares to the existing shareholders or when a new shareholder is introduced. For example, if the intention at a later date is for one of the three shareholders to be given a slightly greater share in the business, this could be achieved by allotting (say) 10 further shares on top of their existing 100. If instead, each shareholder only had one share, any further share issue to one shareholder would mean they had at least double the shareholding of any other member.
- If funds are needed to operate the business, one option is to issue a larger number of shares at the nominal value or at a premium.
- A company with more shares issued – and a larger aggregate capital value – will appear more substantial than a company with less share capital. Because the amount of share capital in issue appears on the public record at Companies House, potential suppliers and creditors can check it and may make judgements about whether to deal with the company based upon it.
- When considering whether to lend to a company, a bank may prefer to see a number of shares issued and capital committed to the company by its founders, rather than heavy reliance being placed on the founders making loans to the business. The same is likely to be true of potential shareholders – why should they buy shares and therefore accept the risk of the company failing if the founders of the company have chosen not to do so?
In both of these examples, the ownership shares are equal. Whether the three shareholders each have one share or one hundred shares, they would retain equal voting rights in the company.
Although a larger number of shares is often preferred where flexibility is required, depending on the precise requirements it may be possible to satisfy that in other ways. Rather than increasing the number of shares in issue, this might include:
- The use of unpaid or partly paid rather than fully paid shares.
- Operating multiple share classes, possibly with different rights attached to each.
- Making loans to the business rather than just issuing shares.
- The use of share options or employee share schemes.
While you may have a clear idea of how to achieve the best share structure for your company, the optimum number of shares to issue will ultimately depend on the particular circumstances. A professional adviser can help you assess the available options based on their familiarity with your situation and what you’re looking to achieve by issuing shares.