Shares and shareholders when setting up a company

The initial share structure records who owns a company limited by shares and the rights attached to that ownership. It deserves a deliberate decision before incorporation, particularly when founders are contributing different amounts of money, work or intellectual property.

Decide who owns what

A company limited by shares needs at least one shareholder. The same person can also be a director. These are different roles: a shareholder owns shares, while a director takes responsibility for managing the company. ^[1]

Create a simple ownership schedule listing each shareholder, number of shares, class, nominal value and amount paid or unpaid. Check that the percentages match the commercial agreement. Avoid choosing a round number merely because the registration form makes it convenient.

Understand rights as well as percentages

Ordinary shares often carry voting and dividend rights, but the exact rights depend on the share class and company documents. Different classes can carry different rights. A percentage alone does not tell you everything about control or entitlement. ^[1][2]

If two founders agree equal ownership but one expects to control every business decision, that difference needs resolving before filing. Rights in the articles and any shareholders agreement should work together rather than contradict one another.

Nominal value is not the business valuation

The nominal amount attached to a share is part of the share capital structure. It is not a statement of what the whole business is worth. Money introduced into the business might instead be recorded as a loan or a share subscription, depending on the agreed arrangement.

For illustration, issuing shares with a low nominal value does not establish the price at which a future investor will buy into a successful business. Investment terms need their own analysis and documentation.

Check control reporting

Shareholdings and voting rights can trigger people with significant control reporting. More than 25% of shares or voting rights is one important condition; control should not be assessed by ownership percentage alone. Check the applicable PSC conditions for the actual arrangement. ^[1]

Before submitting the application

• Agree the ownership split and rights in writing.
• Confirm the identity of each initial shareholder.
• Check the capital figures add up correctly.
• Decide how future investment or a departing founder will be handled.
• Identify any control-reporting implications.

Work through the numbers before agreeing the split

Imagine two founders agreeing sixty per cent and forty per cent ownership in a company with one ordinary share class. If they subscribe for 100 shares, that could mean 60 and 40 shares respectively. With a nominal value of £1 per share, the aggregate nominal capital would be £100. This arithmetic does not tell you how much the business is worth or whether either founder has also lent it money.

Suppose the first founder contributes another £9,900. Decide whether that payment is a loan, part of a differently structured share subscription or something else before recording it. An email saying 'my investment' is too ambiguous to explain repayment rights. The accountant and company adviser should be able to reconcile the agreed funding documents with the bank receipts.

Now consider a later investor receiving 25 newly issued shares of the same class. The total becomes 125 shares. The original founders would then hold 48 per cent and 32 per cent, while the investor would hold 20 per cent, assuming no other changes. This is an illustration of dilution, not a recommendation to issue shares without checking authority, rights, valuation and tax implications.

Connect ownership to practical decisions

Use a decision sheet to separate voting, dividends, capital on closure and transfers. Ask whether rights are the same for every share and whether any decision requires a particular owner's consent. If the founders want different outcomes for different decisions, tell the person preparing the articles rather than assuming a percentage achieves all of them.

A founder who works full time may also need a service agreement and a remuneration arrangement. Share ownership does not itself specify weekly hours or provide a salary. Equally, someone leaving employment with the company does not necessarily cease to own their shares. Deal with those relationships expressly.

Check future promises against today's documents

Early teams often promise a future percentage to a developer, adviser or family member. Maintain a separate list of these proposals and identify which have actually been agreed or implemented. An informal promise can create a commercial dispute even where the register of members has not changed.

Before giving anyone a proposed percentage, model the whole ownership table including existing commitments. Decide whether the proposal involves an immediate subscription, a future transfer or an option that needs separate documentation. Obtain advice before making work-dependent arrangements, because the tax and employment implications depend on the facts.

Produce a usable ownership record

The final pack should let a new adviser answer who holds each class, what was agreed to be paid, what has been paid and which documents explain the rights. Store that pack with the accepted incorporation material. If the numbers or rights cannot be explained consistently, resolve the discrepancy before the company starts offering ownership to anyone else.

Where different share classes, family arrangements or employee participation are proposed, obtain company-law and tax advice before implementing the structure. Correcting an unsuitable arrangement later may involve more than changing an entry in a spreadsheet.

Use company structure review to discuss the proposed ownership and funding before submitting capital figures.