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Limited Companies: What are shares and dividends?

Updated July 2016.

What is the difference between shares and dividends?

Shares ultimately tell you who own the company. Directors are in charge of the company but they may not actually own the company but they could have shares in it. The shareholders are the legal owners of a UK Limited Company.

A private Limited company may have many different shareholders or just a small handful, how much of the company they own can be reflected in the percentage of shares they own in the company. So for example if 100 shares in a company are issued, and Joe Bloggs owns 80 shares, then Joe Bloggs will be the majority shareholder and will owns 80 percent of the company.

Dividend payments

Shareholders are paid via a Dividend. Any profit the company makes can be issued to the shareholder in the form of a dividend. So the more shares you own in the company the larger the dividend (or payment) you will receive. If you are an 80 percent shareholder for example, then you will be entitled to 80 percent of the issued dividend.

Having shares in a company can also give you powers to help shape the business and the way it is run. The shareholders are given voting rights at general company meetings. The more shares you own – the larger the say you have in the running of the business.

How many shares should you create when forming a company?

This is entirely down to you, however we recommend creating a small amount of shares to begin with, so they can be easily divided. If you are going into a partnership, we would recommend 2 or 10, as these can equally shared. We also recommend setting the value of the share are £1 as this equates to the amount you would loose if the company was to go in to administration. Extra shares can be created if needed at a later date, for example if you were to bring in a new director they may want a share as an incentive.

Do I need to inform Companies House of the shareholders?

The short answer is yes. Companies house requires you to maintain the register of all shareholders and shareholdings. When you file your annual return to Companies House, the previous years activities including your list of shareholders and holdings will be publicly available.

What other types of shares are available?

The share most shareholders issue upon company formation is called an ordinary share, and this gives the shareholder equal voting and dividend rights.

There are other types of shares, such as preference, non-voting, B Shares, and may have different options such as no dividend or voting rights, or a smaller or limited dividend percentage. Some well-known companies provide shares to their staff, such as Waitrose, they feel this gives them an incentive. This is where a special type of share can be useful. The type of share you have issued and the function it has will have to be in the Companies Article of Association.

What is the difference between a shareholder and a stakeholder?

A shareholder will own part of your company through stock ownership, but a stakeholder is more concerned with your company performance rather than stock appreciation.

Stakeholders are looking for other guarantees, so for example your company employees may be stakeholders who want to see the company do well so they can keep their jobs. They could be your customers who absolutely rely on you to provide them with the goods or services they need, for example community farm customers who rely on their weekly organic vegetable boxes for food. They may have invested money into the farm to help set it up but wouldn’t expect to get a dividend paid to them.

Shareholders still make up the largest percentage of most registered companies, but they are still affected directly by a companies performance just like a stakeholder would be.

 

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