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What is Share Capital in Business? – Simple Definition, Advantages & Disadvantages

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When you are starting out as a business owner, securing funding is vital. And one effective way to raise funds is by offering capital shares to investors. Shareholders will invest money into your company in exchange for share capital. The value of this shareholder capital will hopefully increase over time, giving a return on their investment. These investments can help you to get your business up and running and keep it operational as you work towards profitability. 

Below, we’ll talk you through everything you need to know about share capital in the UK.

What is Share Capital in Business?

Capital shares in the business are units which represent a portion of company ownership and equity capital. When someone invests in your company, they become shareholders who own shares proportional to the amount they have invested. The value of these shares will rise and fall depending on the success of the company, market conditions, and investor behaviour. 

Shareholder capital will typically be rewarded with profit dividends, share capital UK voting rights, and claims to company assets if the business is liquidated. 

What Type of Shares Can I issue as a Limited Company Owner? 

As a limited company director, you have several choices when it comes to what type of shares you will issue. The best type of shares for your company will depend on a variety of factors, so it is important to do you research and pick the right option for your company growth. 

  • Ordinary Shares: These capital share option are the most popular form of shares. Ordinary shares investors will receive dividends, have shareholder voting rights, and also a share in the company profits or assets when the organisation is liquidated. 
  • Preference Shares: Holders of preference shares usually have preferential investor rights when it comes to dividend payments and distribution of company assets after liquidation. 
  • Redeemable Shares: Redeemable shareholder capital can be bought back by the company according to set terms and prices. This gives the organisation longer-term freedom to manage its capital, operations, and structure. 
  • Deferred Shares: With this type of Share Capital UK investors usually don’t hold any shareholder voting rights. Shareholders may also have lower priority when it comes to dividend payments and liquidation of assets. 
  • Convertible Shares: With these shares, investors have the option to convert the shares they hold after a certain amount of time or under certain conditions (usually to ordinary shares.)

When deciding on the best shareholder capital to issue as a limited company it is essential to work with both financial and legal advisors. You need to make sure you are compliant with rules and regulations. And you also need to be certain that the type of shares you are issuing are most suitable for your company goals and structure. 

What is Share Capital in Business – Advantages and Disadvantages

As you’ve seen from our breakdown of “what is share capital in business” above, issuing shares can be a very effective way to raise funds and grow your business. However, before deciding to offer any share capital UK investors can buy, you need a clear idea of the pros and cons. Here is a quick breakdown for you to consider: 

Advantages of Capital Shares UK: 

  • Avoid Debt Repayments: In contrast to business loans and debts, shareholder capital does not have a set repayment requirement, helping to ease the financial pressure on your company. 
  • Improve Financial Flexibility: Issuing shares can enable an injection of funds into your company when you are starting, expanding, or navigating uncertain periods. 
  • Shared Financial Risks: Capital share investors share the financial risk along with the company, helping to ease repayment obligations if the company suffers losses. 
  • Growth Potential: Use invested funds to expand your company, move into different territories or increase operational or marketing budgets. 

Disadvantages of Issuing Capital Shares: 

  • Dilution of Company Control: Share capital UK investors are often given voting rights and issuing shares can dilute your own levels of control and ownership of your organisation. 
  • Dividend Expectation: Your shareholders will expect to see a return on their investment through dividends. To meet this expectation, you may not be able to reinvest your profits back into the company as you wish or require. 

The best method for accessing funds for your business will depend on a variety of factors. These include your business goals, growth plans, and reinvestment objectives. Make sure you have a clear idea of the both the benefits and pitfalls of shares for your organisation before deciding to move forward with shareholder capital. 

Rules for Issuing Capital Shares 

It is essential to consult with professional legal and financial experts to ensure that you remain compliant when you issue capital shares for your limited company. Here is a quick guide to the rules and Share Capital UK process to give you an idea of where to begin. 

  • Companies must be formally incorporated: Before you can issue any shares, your business needs to be formally incorporated as a legal business. You can do this by preparing the Company Articles of Association and registering with Companies House. 
  • Update Your Articles of Association: Your articles of association need to include details such as the types of shares you are issuing, the procedure for issuing share capital UK investors can buy, and any restrictions on transferring shares. 
  • Allotment Resolution: Company directors must obtain the authorisation of any current shareholders to issue any new shareholder capital. 
  • Issue Share Certificates: Once your company shares have been allotted, you will issue share certificates to investors. These certificates should include the shareholders’ name, the company name, the class and amount of shares, registration numbers, and any rights that come with share ownership.  
  • Filing with Companies House: When you issue new shares you will be required to file new document with Companies House. These will include a statement of capital. 

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As you can see from our answer to “What is share capital in business?” – issuing shares is an effective and financial-savvy way to access funds for establishing or growing your company. However, before you begin the process it is essential to make sure this type of funding is the right choice for your business goals. If you choose to issue share capital , it is essential to consult with professional experts to make sure you remain compliant with the rules and regulations governing the process and that this is the right way to get funding for your business. 

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