Audit and Accountancy

Share Structures

Shares represent ownership of a company. When an individual buys shares in your company they become one of the owners of the company. Shareholders choose who runs a company and are involved in making key decisions such as whether a business should be sold or not. Whilst shares are most obviously associated with the stock market, the majority of small businesses will not go anywhere near a stock market in their lifetime. Instead they are more likely to give out shares in their company in return for a lump sum investment. This may either be from friend and family or, for businesses that are looking for high growth, through formal equity funding finance. A company may have many different types of shares that come with different conditions and rights. There are four main types of shares:

  • Ordinary shares are standard shares with no special rights or restrictions. They have the potential to give the highest financial gains, but also have the highest risk. Ordinary shareholders are the last to be paid if the company is wound-up.
  • Preference shares typically carry a right that gives the holder preferential treatment when annual dividends are distributed to shareholders. Shares in this category have a fixed value, which means that a shareholder would not benefit from an increase in the business's profits. However, they usually have rights to their dividend ahead of ordinary shareholders if the business is in trouble. Also, where a business is wound-up, they are likey to be repaid the par value of shares ahead of ordinary shareholders.
  • Cumulative preference shares give holders the right that, if a dividend cannot be paid one year, it will be carried forward to successive years. Dividends on cumulative preference shares must be paid, despite the earning levels of the business.
  • Redeemable shares come with an agreement that the company can buy them back at a future date - this can be at a fixed date or at the choice of the business. A company cannot issue only redeemable shares.

Shares can be a complex issue for a business and have many uses - an employee incentive, to raise capital and specialist advice it always the best course of action to ensure effective tax planning.


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