Business News, United Kingdom

Company formation: how allocate company shares?

How to manage company shares_

During company formation the founders must consider how to allocate shares among themselves. In some cases this may be a simple task, for instance if there is just one person forming the company a single share could be issued. In the case of more than one person the founders must consider the proportion of shares that each will receive. This will have implications for voting powers and for the proportion that each shareholder will receive when dividends are declared by the company.

The allocation of shares will be regulated by the Articles of Association of the company which set out the regulations by which the company is to be managed. The Articles may be written out by the founders or they may adopt a standard model such as the Articles of Association for a company limited by shares provided in the Companies Act. The standard Articles allow for different classes of share to be issued, for example with different voting rights, but the allocation of shares should be kept as simple as possible to avoid unnecessary problems at a later date.

There is no rule about how many shares should be issued. Where the founders are allocating equal proportions this could be done by allocating one share each, or giving the appropriate proportions of share capital of one hundred. As the shares need to be paid up there is no point in making the amount of share capital too high. Also bear in mind that the amount of share capital contributed by each shareholder would be lost in the event of insolvency. The Model Articles of Association require the company to issue share certificates to the shareholders.

Allocation of shares must also take into account future dividend payments.

The Companies Act 2006 removed the requirement for an authorized share capital to be included in the Memorandum of Association. This means that the directors may increase the share capital at any time by allotting new shares in the company. If a new company wants to place a restriction on the number of shares that may be issued, for example to avoid dilution of the existing shareholdings, a provision to this effect would need to be written into the Articles of Association.


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