One of the most common company secretarial tasks we perform (other than the background noise of confirmation statements and dividend vouchers and updating director details) is filing the paperwork with Companies House to do a share split.
Many of our clients formed their companies with one share of one pound, or maybe 2 shares or 50 shares. A few years later on, they’ve found this to be a constraint.
Why is that, I hear you ask?
Well, let’s say that John Smith Limited was formed by Mr Smith with one share of one pound. A few years later, he wants Mrs Smith to own a third so she benefits from dividend tax breaks…….or maybe she is in a lower income tax bracket. Whatever his reasons, Mr Smith has a problem. He’s only got 1 share in the company, so whoever owns that share has 100% of the company. He can’t divide it up.
Some would refer to this state as being an illiquid market for John Smith Limited shares.
Now, if Mr Smith had created his company with 100 shares of one pound each, or even just 100 shares of one penny if he didn’t want to put up another £99 of equity, he could transfer 33 shares to Mrs Smith and retain 67 shares for himself. Or, 34 and 66 depending on which of them won the debate as to the fraction of a share at stake.
Of course, Mr Smith could’ve gone the whole hog. The regime in the UK allows for the nominal value of a share to be one hundredth of a penny (so £0.0001) which means he has the flexibility to transfer 3,333/4 to Mrs Smith and retain 6,666/7 himself.
If Mr Smith and Mrs Smith had a child and wanted to bring them into the business, it’s a lot easier to do so by transferring units of worth of 1/10,000th the company than an all-or-nothing unit of 100%. The same applies if they wanted to reward long-serving members of staff, donate some of the value of the business to charity, and it certainly doesn’t hurt if they were looking to raise equity investment.
Fundamentally, the more shares you have, the easier it is to play tunes with your shareholdings.
It’s very easy during the excitement of forming a company and making your leap into business yourself to overlook some of these more esoteric points; but don’t worry, splitting Mr Smith’s shares from one of £1 into 10,000 of 0.01p is just some paperwork for most companies, especially those that adopted model articles. If you incorporated with bespoke articles, all is not lost, it just requires more due diligence up front.
Mr Smith could’ve created another share class too, with different voting rights or dividend distribution for employees or his children, or anyone he needed. The reasons why you would do that, and the possible permeations warrant their own blog, in due course.
All of Exonia’s accounting clients have company secretarial services included in their annual fee, which covers share splits and new share issues on model articles. Those on a “plus” tariff are covered for more advanced work with bespoke articles too.