What are Shares?
Shares stand for ownership of a company. When an individual purchase shares in your shares, they become one of its owners. Shareholders elect who operates a company and are concerned with making key decisions like if a business ought to be sold.
While shares are apparently associated with the stock market, most small businesses are unlikely to be physically present on the stock market. They would rather issue shares in their company for a lump sum investment. The investment may either come from family and friends, or for businesses that are searching for capital to finance high growth, via formal equity funding finance.
Formal equity finance can be had thru :
- Angel investors;
- Venture capital firms;
- Stock markets.
The aforementioned investors are eager to put up capital for a share in a growing business. The merit of raising capital in this manner is that the money does not have to be repaid, and there’s no paying of interest either. Rather, shareholders have the right to a share of the company’s distributed profits, also called ‘dividends’.
Kinds of shares
A company may have diverse shares that come with varied conditions and rights regarding profit entitlement, entitlement to capital in case the business is wound up, and voting rights within the business.
- Ordinary shares
The most common types of shares, come with neither rights nor restrictions. They can potentially get you the highest gains. The attendant risks are also high. Ordinary shareholders have voting rights, and they are paid in case the company winds up ;
- Non-voting ordinary shares
Non-voting ordinary shares are the same as above mentioned type, save for the fact that they gave no voting rights other than in very special circumstances;
- Preference shares
Preference shares generally come with the right that the holder gets preferential treatment at the time of annual dividend distribution. There are fixed dividends. The shareholder does not enjoy an accretion in the company’s profits. nonetheless, they do have rights to their dividend, more so than ordinary shareholders, if the business is in jeopardy ;
- Cumulative preference shares
These shares offer holders the right that, in case a dividend is not paid a year, it will be carried forward to successive years. As long as the company shows it is profitable, it is mandatory that these dividends are paid ;
- Redeemable shares
These shares come with an agreement that the company can repurchase them sometime in the future. This may be at a fixed date, or as per the business’s wish. A company also may not issue just redeemable shares. There must be other options to be had from them.
Sale and transfer of shares
Share dealing being fairly intricate, expert advice ought to be sought from company law agencies and accountants. transfer/transmission of shares
Shares in a listed company are transferred via brokers(Like Primefin) using the relevant service, that in the UK, in particular, being Stock Exchange Euro-clear Service. Moreover, in a private or unlimited company, shares are typically transferred via a private agreement between the buyer and seller, subject to the company’s rules and the directors’ approval.
There are specific taxes applicable when you transfer/sell shares: in the event of your transferring shares yourself employing a paper stock transfer from Stamp Duty would likely be payable, when the value is over specific limits; Stamp Duty reserve tax is generally payable when you transfer shares via a broker employing the Euro clear service; gains accruing to you by the sale of shares may be subject to Capital Gains Tax.
Prospectus issuance
Should you wish to list your company on the Stock Exchange or provide unlisted securities to the public, you may need to publish a prospectus. It lies only within the purview of a public limited company to do this.
The prospectus serves three objectives:
- Laying out all the info that is mandated per Listing Rules to be public knowledge;
- Acting a marketing tool for company shares by detailing the business and its possibilities and prospects;
- Laying out the company shares’ respective price and the amount of capital that may hopefully be raised.
Paying dividends and paying tax
At the calendar year’s end, a company board determines if the business has done sufficiently to pay shareholders a dividend. A dividend is a portion of the company’s profits offered to shareholders. In larger companies, it is the regular for an interim dividend to be paid at the half-year point. The dividend is reckoned per share, so the more shares you own, the more you are paid.
Dividends are subject to income tax.
At the time of paying dividends, the company has to send a dividend voucher to the shareholder by post. This shows the dividend amount and the amount of tax credit. The tax credit shows the amount of tax paid by the company on the shareholders’ behalf. Dividends are paid following tax deduction at a basic rate. In case you pay a higher tax rate, you will have to pay additional tax on the dividend you receive.
Conclusion
To alter the class of shares implies meticulous planning and drafting articles of association. Time and money are expended. It is best that you have the will to be set up optimally right from Day One. share structuring and structured shares’ effect on a company are a separate field rewarding attention.
