Company shares and shareholders
Types of shares
A company may have many different types of shares that come with different conditions and rights in relation to profit entitlement, entitlement to capital if the business is wound up and voting rights within the business.
The five main types of shares are:
1. Ordinary shares are the most common type of shares and are standard shares with no special rights or restrictions. They have the potential to give the highest financial gains, but also have the highest risk. Ordinary shareholders are entitled to voting rights, however, they are the last to be paid if the company is wound up.
2. Non-voting ordinary shares carry the same conditions as ordinary shares except with regards to voting rights. Shareholders may have voting rights under certain circumstances or they may have no voting rights at all.
3. Preference shares typically carry a right that gives the holder preferential treatment when annual dividends are distributed to shareholders. Shares in this category receive a fixed dividend, which means that a shareholder would not benefit from an increase in the business' profits. However, usually they have rights to their dividend ahead of ordinary shareholders if the business is in trouble. Preference shares carry no voting rights.
4. Cumulative preference shares give holders the right that, if a dividend cannot be paid one year, it will be carried forward to successive years. Dividends on cumulative preference shares must be paid, despite the earning levels of the business, provided the company has profits that can be distributed.
5. Redeemable shares come with an agreement that the company can buy them back at a future date - this can be at a fixed date or at the choice of the business. A company cannot issue only redeemable shares, so they must ensure that they also issue non-reedeemable shares.
Most companies use ordinary shares, however, it is possible to issue more than one kind of share class as a way to vary shareholder voting, dividend and capital rights.
If you are considering issuing various types of shares in your company, it would be advisable to speak to an accountant. Choose an accountant for your business.
Companies House provide guidance for limited companies, partnerships and other company types.
For information on how you can use these shares as an employee incentive, see set up employee share schemes.
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