When a private limited company is set up, the first shareholder chooses how many shares a private company can issue. But as per the government, there is a minimum requirement, where the company has to issue at least one share in the company. There is no upper limit to the number of shares issued unless the shareholders choose to add restrictions while incorporating their company.
So when you register a new company, you can choose the number of shares you want. And this decision would obviously be based on the number of shareholders you want in your company. It would also be based on your plan in the future to raise funding from investors in exchange for company shares. Initially, if you are setting up the company on your own, you can just issue one share to yourself.
This one share would represent the whole company, making you the 100% owner of the company. On the other hand, you may want to issue more shares to yourself, or to other people if you are opening your business with more partners. Usually, even numbered shares are preferred, such as two, four, 20, 100, etc. It makes it easier to get the percentage of ownership of each shareholder then. This percentage then helps in understanding the amount of company profits each person receives.
TYPES OF SHARES ISSUED FOR A PRIVATE LIMITED COMPANY
There are many different types of shares in a private limited company, also known as classes of shares, and come with different rights. These include:
Ordinary shares: This is the standard kind of share that has no special restrictions or rights to it. Each share offers equal rights to the shareholders of the company. In short, with each share comes one vote that the shareholder can use on matters in the general meeting of the company. They also come with the right to receive dividends and the right to share in any remaining assets or capital when the company is being wound up.
Preference shares: These shares do not have the right to vote in the general meetings. This class of shares has the right to preferential treatment when the dividends are paid out. In short, those who hold these shares would be paid before the ordinary shareholders are paid dividends from the company profits. But the preference shareholders would get a fixed dividend sum. This is great for investors especially when the company is undergoing a lot of financial difficulties. Nonetheless, if the profits in the company increase, the shareholders would lose out on that.
Cumulative Preference shares: This share has the right where the unpaid dividends of one year can be carried forward to the next year and so on. In short, if a shareholder misses a dividend in one year, they would get the missed amount along with the next year’s dividend. This means that the shareholder is guaranteed to get their profit entitlement at some point. Plus, just like preference shares, these shares do not have the right to vote in general meetings.
Non-voting shares: As the name suggests, these shares do not come with the right to vote in general meetings. This share of a private limited company is normally given to family members or the employees in the company as compensation along with their earnings. It is a great way since companies do not want their employees to be able to vote on any important matters in the company.
Redeemable shares: Redeemable shares are those shares that the company can buy back at some point in the future. The date on which they can be bought can be fixed earlier or can be in response to a specific event. This type of share is often issued to directors with the provision that they will be redeemed if and when the director leaves the company.
Management shares: Management shares have additional voting rights with them. This includes having 5 votes per share or even 15 votes per share. This class of shares is usually given to the main shareholders of the company, allowing them to retain most of the control and power in the company.
WHAT’S THE PROCESS OF ISSUING NEW SHARES IN A PRIVATE LIMITED COMPANY?
If you are about to issue shares in a private limited company, you need to follow some rules. These include:
- Getting the board’s or major shareholder’s approval.
- Preparing all the needed documents for the issuance including share certificates, shareholder agreements, and so on.
- Comply with state and federal rules by letting the investor know the risk they are taking by investing in the company.
- Keeping a copy of all the documents created, including the share certificates.
RIGHTS ATTACHED TO SHARES
As mentioned above, each share class has its own rights. To keep things simple, we will just talk about the rights that come with ordinary shares. The rights that come with ordinary shares in a private limited company are normally known as the ‘prescribed particulars’. These rights are mentioned in the company’s articles of association, and also in the private shareholders’ agreement at times.
For the ordinary shares in a private limited company, these are the rights that come with it include:
- Capital distribution rights: Each share has the right to get the distribution made from winding up the company. In short, the shareholder has the right to a share of all the assets and money based on their percentage of ownership when the company is being wound up.
- Dividend rights: Each share has the right to dividend payments or any other distribution in the company. This means that the shareholder has the basic rights to get a percentage of the company’s profits in relation to each of their shares.
- Voting rights: Each share has the right of one vote in any circumstance of the company. This means that the shareholder can cast one vote for each share they own on important matters in the general meetings.
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