Hello Everyone,

This is such a useful source of help and advice! I am a new member of the forum, and I wonder if someone could just check my understanding of how shareholdings are dealt with when setting up a new private limited company. I have read the other threads on this topic and I have experience of being a director and company secretary of an established company, but setting up from scratch is new to me!

There will be 3 owners of the business, who will be equal shareholders and directors. We are seeing an accountant and lawyer but I just wanted this straight in my head first. Is the following correct (with a couple of questions thrown in)?

The authorised share capital is intended be the standard minimum ?,000 split into 1000 x ? shares. If each of the 3 shareholders has 1 share each, that means that 3 shares have been issued, and issued share capital is therefore ? and unissued is ?97. When opening the company bank account with the profits from the first job, each shareholder can choose to pay in their nominal ? each so that the 3 shares are paid up. This means that the business is still fully owned equally by 3 people. If the business were to fail in the future, their liability would be limited to paying out the remaining ?97. In the meantime, this ?97 remains in the accounts as a company debt.

Questions (sorry if I’m not being very bright here):
1) As there are 3 people, is it best to have an authorised share capital that is more easily divisible by 3 (i.e. ?,002)?
2) Just in case the business were to fail in future, would it be more sensible now for each of the 3 shareholders to fully pay for all shares, i.e. 334 each, at a cost therefore of ?34 each, so that there would be no future financial liabilities at all?
3) The wives/partners of the 3 owners of the business will be contributing in some way to the business both by some admin tasks/record-keeping on an ongoing basis, and more significantly, providing family income and a safety net while the business gets established. It seems reasonable to me that if those 3 people also wish to become shareholders at the outset, they should be allowed to, either in equal parts with the main owners of the business (split 6 ways) or in lesser amounts. Does anyone have views on whether this might be a good/bad idea?

Thanks so much for any comments,

Lin
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The most sensible option is to probably just have 10 shares and take 3 each. i would keep it in rounded numbers. no reason why you need 1000 shares. i normally have 100. it is just easier to play with.
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Ah, so the share capital is split into 10 shares of ?00 each, they each pay ?00 for 3 shares each, leaving only ?00 unissued.

Thanks, Moneyman, that's sounding less complicated already!

Lin
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There's no reason not to have ?,000 authorised share capital. It doesn't cost any more to form or run the company, and it gives more flexibility in future.

If you do issue 3 shares, and the company fails (let's hope not) then the shareholders do not have to pay in the balance of ?97. Their liabiity is limited to the shares that they have taken, and as they are paid for in full, they wouldn't have anything further to pay. For that reason you don't need the authorised capital to divide by 3.

Having said that, I wouldn't go with three shares, because thats inflexible. It's not uncommon for one of the founding shareholders to leave, and you can't have 1.5 shares each. Also consider the possibility that you might want to split shareholdings between existing shareholders and their "other halves" for tax efficiency, or for the reasons that you've given. I would tend to go with 40 shares each, a total of 120.

I would also have a separate shareholders agreement which sets out the right of continuing shareholders to buy out shares in the event of death or other circumstances.
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Lin

One reason for having unissued shares is to have the "spares" available for issue in the future - if for instance the wives were later to become shareholders. There are ways round this, but it's convenient if the structure is there.

Dont forget that if one day the company is worth say ?m, each share will be worth ?33,333, in which case it may be better for Inheritance Tax if the wives have equal shares from the start. Remember also that as the company grows in value, share transactions will have Capital Gains implications.

You may also wish to consider who will be chair of the board - this person will have a casting vote in the event of dispute (ok, less likely in the case of a 3 person board).

Chris
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Thanks Chris and David for those further thoughts ?this is really helping me think through the issues.

Good to be reassured that the liability is limited to issued and paid for shares, and that there will be no great personal financial risks. The youngest and least experienced of the three owners was understandably nervous about this.

We were concerned about how to deal with shareholders who may want to leave the company in the future, and your mention of the shareholders agreement has reminded me that we must do that, to make things clear if one person wants to retire or exit for another reason from the business. The idea of having some flexibility in numbers of shares for this reason also makes sense. In fact, it reminded me that in the last company I worked for, the 6 shareholders there had 40 shares each and had built up the company over 20 years from nothing (like ours) to a SME. That structure seemed to serve them well throughout, and coped with changes in shareholdings due to retirement and for tax efficiency. So ?that makes me feel that it would be a good idea to follow the same pattern. I hope we make that ?m value some day! ;)

I hadn’t thought about a Chair of the Board, so I’ll add that to my list of decisions-to-be-made too.

Lin
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As taxattack says, there shouldn't be a problem about casting votes with three people involved, but you should always have some kind of dispute resolution mechanism that doesn't involve courts. You could have 1 shareholder for, 1 against and one who never turns up to meetings.

In my experience, it's procrastination that's the biggest problem. There are exceptions, but I tend to think that the wrong decision is often better than NO decision!
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Thanks again. We had a first meeting with the lawyer yesterday and he thinks, depending on what we precisely want to include, we may be able to cover rights/obligations of shareholders (including an agreement about how disputes should be resolved) in the Memorandum of Articles & Association instead of having to make a separate shareholders agreement (but we will definitely make a separate one if need be).

One thing that did come up was that the 3 main workers in the business who will also be the 3 directors, really like the idea of including the 3 wives/partners as additional and equal shareholders from the outset, so: 3 directors and 6 shareholders. However, the strong feeling was that people should only benefit from the business as long as they continue to tangibly contribute to it in some way.

So, the one question we didn't really get the answer to is if, for example one of the directors retires, and there's a written agreement that if they leave the company for whatever reason then they are obliged to sell their shares to the remaining shareholders, can it be worded so that the wife/partner of that director also has to sell her shares at the same time?

And what would happen if (worst case scenario) a director and his partner split up, he continues as a director/shareholder and she wants to retain her shares but has nothing else to do with him and the company? I suspect that a company can't just get rid of shareholders it doesn't want anymore (and it wouldn't necessarily be fair to the wife who'd put in the initial effort to help get the company going in the first place!). If the 3 main people doing the daily work are concerned that it might lead to future unfairness to have all 6 as shareholders, I wonder if it's better to just keep ownership simple at this stage between the 3 main people? We don't want to set ourselves up for future disputes!

I am so much appreciating being able to think this through with experienced business people - thank you.

Lin
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Lin,

A few of my thoughts ?I’m not qualified, so might be wrong ?your lawyer can confirm of dispute the following.

It's quite easy to include decision making powers in the Articles of Memorandum. You do need to keep the wording simple, but on the face of it, it is simple.

There are different types of shares, as well as different director positions. There are class A and class B shares. (A) = involved in decisions (B) = not.

You can also specify that if a director leaves, he must sell his shares back - this is done quite often. As for automatically making his wife give her shares back, I'm not so sure. You can, however, at the time of him leaving, request to buy back her shares.

The divorce thing is a little tricky. If she doesn't want to give up her share, as far as I know, it's tough. However, if she has a class B share, and you pay no share dividend, that she can't do much with it (so might as well sell it back). That would solve your issue, as morally the problem would be to reduce any negative impact - and not be spiteful.

Also, I think you should be mindful of who you get for official advice ?lawyers are great, but if they don’t specialise, then be careful. You should also consult an accountant ?in many cases, they are the experts who deal with Companies House.
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That's an interesting scenario, and it's the lawyer's job to put your wishes into writing. There are a few ways that you could possibly get round this, but it does need to be set up properly. As innovengine says, you could have different classes of shares, A B & C for example. It's not difficult to say that a particular shareholder must sell his shares if he ceases to work full time. You could possibly create an option so that the remaining shareholders have the right to acquire the sahres of B's "other half" if B ceases to be a shareholder, and at the same price that B got. You'd also have to cover the situation of the personal relationship breaking down but B remaining with the company. Perhaps classes D E F of redeemable shares?

You can also have a provision that a certain class of shares is only entitled to share in dividends or distribtions of capital as long as a nominated person is a director or employee of the company.

You can't force anybody to give up shares against their will, in most situations, which is why you have to cover it at the outset, or simply run with the risk.

BTW, it sounds as if the lawyer is creating bespoke Mem and Arts. Did he tell you how much it would cost?

I bet that statistically ten years from the start that you'll probably have the same accountant, probably the same bank, but one of the shareholders will probably have left and a racing certainty that one of the 3 founders will have parted from his/her other half! That's life?
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Thank you innovengine and David; lots of interesting options for us to consider there. We're trying to get it as right as possible from the start, and at least go into it knowing what we're committing to and the implications for the future.

I think you said it exactly, David: "I bet that statistically ten years from the start that you'll probably have the same accountant, probably the same bank, but one of the shareholders will probably have left and a racing certainty that one of the 3 founders will have parted from his/her other half! That's life?"

As for cost, the lawyer seemed to think that if we want some special clauses in the standard Memorandum, then it would probably be cheaper/easier for him to to make amendments to these docs than to draw up a totally separate shareholders' agreement. I will double-check though, as I am trying to balance getting the structure right from the start with keeping set-up costs down!

Lin
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