Have you decided to start up and incorporate a company yet? In case you are in this experience for the first time, you will be wondering about so many queries from different aspects. On the other hand, you might have formed your company already and you are well aware of the issues that you will face painfully in the process of incorporation. This is because of the different types of shares that you possibly allow yourself to issue on the way to incorporation.
Moreover, this involves the implication of a significant long term. If you are able to realise the foreseeable requirement to increase the finance equity through fundraising options or the investors, this will help you to develop an understanding of the issuing of shares and what is the importance of it. The amount relation to their condition, entitlement, and rights.
You need to realise that these consequences will affect the decision making in the business. Also if you aim to make the amendments in future this will turn out to be expensive and a complicated process. In this blog, you will find out more about the different types of shares a company can have and what is needed for them.
Get in touch with one of our professionals to learn about the types of shares that your limited company can have?
What Is The Need for Different Types of Shares?
In the initial stage, all the companies tend to have more than one shareholder and possibly the types of shares that are issued tend to be different and this depends on the ambitions and circumstances of the founder who owns the business most. Moreover, in a limited company, the type of shares get importance according to their ability to give profits to the business owners.
Tax-efficient remuneration is one such example of the process of voting rights of the director. At the initial stage of a business, while the set-up is being processed, there is no set type of hares provided. Small companies that have rights to dividends tend to issue ordinary shares in many cases as well. In the case of such a company that has only a single shareholder, then a single share will be provided and this is the simplest way.
On the other hand, when a company has multiple shareholders and the amount of share capital is different as well, all the aspects should be considered. Further in the discussion, you will explore the types of shares with their relevant explanation.
1- The Redeemable Shares
The condition and terms associated with redeemable shares are that the company aims to purchase these shares again in the future. This is a fixed condition and this could be a part of the director’s discretion as well. This practice involves the non voting shares that are provided to the employees of the company. In case the employee aims to leave the company, the shares will possibly be returned to the company with the nominal value.
2- Preference Shares
Preference shares involve the owner of the company and due to this a fixed amount of dividends is given to him every year. The nominal value is the value that was decided at the time of issuance of the shares. Also, a percentage of nominal value is considered usually.
3- Non-Voting Shares
There is no right to vote that comes with ordinary non-voting shares. So there is no right given that you can be a part of the general meetings. Normally employees are given these shares to ensure the remuneration is paid in form of dividends. This will bring the factor of tax efficacy for both sides.
4- Ordinary Shares
The most common type of share is the ordinary share. As they tend to carry a vote for one share. In this case, the owner of the company has to ensure equal participation in the dividends of the company. In case the company is going through a low phase, even then the proceeds will be allocated equally.
Moreover, voting rights are associated with ordinary shares. However, they are ranked after the prefect shares. This is because of capital rights to balance the wound-up events of the company. There is a possibility to break the shares further but we will adhere to the discussion on basic share types here only.
The Bottom Line
To sum up the discussion we can say that you can not avoid the ownership of a limited company without being affected by the types of shares. This is why it is important to have a basic understanding of all the aspects in this regard. In case you are a beginner, you will soon be raring to go in the process, even if you have gained the experience already, this is challenging to deal with the share affairs in your company.
The long terms implications for the shares and shareholders will have a huge impact on the growth of your company and business valuation. We hope these few minutes of reading have helped to develop a better understanding and you will be able to make smart business choices while you aim to incorporate them in this regard.
Disclaimer: The information about different types of shares provided in this blog including text and graphics in general. It does not intend to disregard any of the professional advice.