What are shareholders and shares in UK limited companies?

Introduction

Shareholders and shares are units of ownership in a company. Shares are the individual units of ownership, and shareholders are the people (or entities) who own those units. Understanding shares and shareholders is crucial because share ownership determines who controls the company and who shares in its profits (dividends) and liabilities.

What is a shareholder?

A shareholder (also called a member) is anyone who legally owns one or more shares in a UK company limited by shares. Each share represents a slice of the business. For example, if a company has 100 shares in total, owning 25 shares means you own 25% of the company. Shareholders are entitled to a corresponding portion of the company’s profits (dividends) based on their percentage of shares.

In practical terms, shareholders can include individuals, groups or other companies. The first shareholders (founders) are often called subscribers during company formation when they agree to take shares.

Who can be a shareholder in a UK company?

Virtually anyone or any entity can be a shareholder in a UK private limited company. This includes individuals in the UK or overseas, as well as other companies, charities, partnerships, or trusts. There is no residency requirement – a non-UK resident can own shares just as easily as a UK resident. By law, a private limited company must have at least one shareholder to incorporate. There is no upper limit on the number of shareholders a company can have. Many small businesses start with a single owner who is the sole shareholder. That person can later sell or transfer shares to add partners or investors.

Shareholder vs director – what’s the difference?

Here’s a quick table showing the key differences between a shareholder and a director. The confusion often arises from the fact that in many small businesses, the founder serves as both the sole shareholder and the sole director.

Shareholders and directors have very different roles. Shareholders provide capital (investment) and have an ownership stake, whereas directors are appointed by the shareholders (or elected by them) to run the company.

What do shareholders do?

Shareholders mainly invest in and oversee the company. They do not handle daily operations unless they are also directors. Key activities of shareholders include:

Receiving dividends

If the company makes a profit and the directors declare dividends, shareholders get a share of those profits proportional to their holdings.

Voting on decisions

Shareholders vote at general meetings (or by written resolution) on major issues, such as appointing or removing directors, approving the annual accounts, or altering the company’s articles.

Approving share changes

Shareholders must agree to changes in the share structure, such as issuing new shares or transferring large blocks of shares to others.

Calling meetings

Shareholders (typically those holding enough shares) can request extra general meetings or propose resolutions if needed.

In summary, shareholders help shape the company’s direction and reap financial rewards, but they leave day-to-day management to the directors.

What rights do shareholders have?

By default, holders of ordinary shares enjoy key rights under UK law and the company’s articles. These include:

• Right to dividends: Shareholders are entitled to a share of the company’s distributed profits (dividends) in proportion to their shareholding.
• Right to vote: Shareholders can vote on resolutions at general meetings, influencing decisions like appointing directors or changing the company rules.
• Right to inspect company records: Shareholders can inspect the company’s books and statutory records, including annual accounts and meeting minutes.
• Right to transfer shares: Shareholders can typically sell or transfer their shares to another person.
• Right to attend meetings: Shareholders can attend general meetings (AGMs or EGMs) and receive formal notice of these meetings.

Additional rights or restrictions may apply for different share classes. For example, some share classes can be non-voting or have fixed dividends.

What are shares?

Shares are essentially slices of ownership. A share is a piece of the company, and each share represents a percentage of ownership equal to one divided by the total number of shares issued. For example:

• If a company issues one share, that share represents 100% ownership of the company.
• If it issues 10 equal-value shares, each share represents 10% ownership of the company.
• If it issues 100 equal-value shares, each share is 1%.

So, owning more shares means owning a larger part of the company. A company can start with just one share (common when a founder is the sole owner). There is no legal cap on the total number of shares a company can create, and founders often issue additional shares later to bring in new partners or raise capital.

How do shares work in a UK limited company?

Each share also has a nominal value (often a small amount, such as £0.01 or £1). This nominal (par) value is the amount each shareholder is legally liable for if the company fails. In a limited company, shareholders’ personal risk is generally limited to the unpaid nominal value of their shares.

For example, if shares have a nominal value of £1 and are fully paid up, a shareholder’s maximum loss is £1 per share if the company becomes insolvent. The actual market value of a share can be higher or lower if it is bought or sold, but the nominal value remains the accounting reference.

Shares can also come in different classes. Ordinary shares usually carry voting and dividend rights. However, a company might issue non-voting shares or preference shares with special rules. For example, some classes of shares may not be entitled to dividends or to vote on certain matters. It’s important to know the rights attached to your share class as set out in the company’s articles.

Can shareholders be changed?

Yes. You can add or remove shareholders by reallocating shares. For example, to bring in a new co-founder, you might issue new shares to them (increasing the total share capital). To remove a shareholder, that person would sell or transfer their shares to someone else. Either way, the company must update its register of members to record the new ownership.

After such transactions, the company must often pass a special resolution and file relevant documents with Companies House (for example, a stock transfer form or a return of allotment). For example, to add a new shareholder via the issue of new shares, a company typically files a form (SH01) and a confirmation statement. 1st Formations provides an Issue of Shares Service to help prepare and file the necessary paperwork, and a Transfer of Shares Service to handle share transfers. These services ensure the change of shareholders is done correctly, and the company records are updated.

In summary, shareholders can be changed by formally transferring ownership of shares, but the company’s legal records must be updated accordingly.