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Whether you started as a solopreneur or as a small team, there may come a time when you want to add more shareholders to your limited company. To avoid HMRC or Companies House-related mishaps, you need to know the official process for adding a shareholder…
A limited business is made up of one or more shareholders. As the name suggests, these shareholders own shares in the company and therefore have control over the organisation and its assets.
As a company evolves, you may choose to add new shareholders, which involves filling out a Stock Transfer Form with HMRC, issuing a share certificate and formally notifying Companies House of the change.
Before you rush to add a new shareholder, it’s worth considering a few things first: how many shares will they have? How will this impact share distribution for other shareholders? Will the new shareholder(s) be required to invest capital into the business?
In this guide, we’ll cover how to add a new shareholder to a limited company, including why you might be choosing to take this step, and ways to ensure the change is as efficient as possible. Let’s get started…
What are shareholders in a limited company?
A shareholder is an individual or company that owns at least one share in a limited company.
If you’re the only shareholder, for example, you will own all of the shares and, therefore 100% of the business. But if you have more than one shareholder, you will need to determine what percentage of shares each person will own and who will be the primary shareholder.
What can shareholders do?
In a limited company, shareholders can do several things, including:
- Appoint company directors: Shareholders have the voting power to both appoint and remove company directors
- Receive money: Typically in the form of dividends.
- Vote: They get a say on any significant decisions.
- Enter agreements: A shareholder agreement is a private contract that outlines how a company operates.
- Inspect records: A shareholder typically has visibility over company records and accounts.
- Attend meetings: General meetings and other shareholder meetings.
- Receive payment upon winding up: If a company is wound up, shareholders will receive a share of the remaining funds.
- Pre-emption rights and other share distribution rights: Shareholders get first refusal when a company issues new shares.
The shareholder’s specific share distribution will impact all of these things. For example, the percentage of shares you own dictates how much you’d be able to receive in dividends. If a single shareholder has a majority share (more than 50%), they have privileges, including voting power.
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Who can become a company shareholder?
Any individual or company can be a shareholder of a limited company, including children (unless specified by a company’s articles). However, a person must be over 16 to become a director, and over 18 to enter into legal contracts. A company can also become a shareholder of another company.
What’s the difference between a shareholder and a director?
Shareholders own the company via shares, whereas a director manages it - often directors will be shareholders, but not all shareholders are directors. Read our guide to learn more about the responsibilities of a company director.
Now you know who can be a shareholder, let’s take a look at why you might add new ones…
Reasons for adding new shareholders
There are a few reasons why you might want to add new shareholders to your limited company; the most common include:
- Setting up a new company: A limited company requires at least one shareholder who can be a director. If there is just one shareholder, they will own 100% of the shares. If you're in the process of setting up a new Limited company, we'd recommend you checking out our article 'costs involved in setting up a limited company in the UK' for more information.
- Raising capital: An investor might choose to invest in your company in exchange for shares. This means they will get a profit share, dividends, and voting rights. You might also want to raise money to pay off debt, and selling shares is a popular way to do that.
- Bringing in expertise: Investment might not always be cash; it could also be time or skills - you might want to bring in a more experienced shareholder to support your company operations.
- Replacing shareholders: If a shareholder retires or leaves the company, you can sell their shares to someone else.
- Giving shares to a family member as part of a tax-planning or inheritance strategy
- Provide employee benefits: Giving employees a stake in your company is a common way to ensure loyalty and reward.
Adding new shareholders is often hugely beneficial to a limited company, especially if you are in a period of change, such as the retirement of a current director. You’re probably familiar with the TV show Dragon’s Den, for example, in which entrepreneurs will ask for investment from successful business people – often, the Dragons will request a percentage share of the business in exchange for their cash and expertise.
Another example of adding shareholders is through the employee share scheme. Retailer John Lewis is a great example of this strategy, with over 74,000 staff holding a small share in the business via an employee trust.
So, adding new shareholders can take place on very different scales - from adding one other person to help manage your small business to giving a large team of employees a piece of the pie. Whichever approach you’re going for, let’s dive deeper into how to add new shareholders to your business.
How to add new shareholders to your limited company
When you add a new shareholder to your business, you have the option of issuing new shares or giving them a percentage of existing shares, either from one or multiple current shareholders. It’s worth noting that if a new shareholder holds more than 25% of the shares (and therefore will become a ‘person with significant control'), you will need to inform Companies House within 14 days of their appointment.
Issuing new shares
A company can issue new shares to a new shareholder. Doing this means you are increasing the company’s share capital, known as the allotment of shares. This is the most common approach when raising capital. To issue new shares, existing shareholders will need to hold a general meeting and pass a resolution.
As company shares are calculated as a percentage of the company, issuing new shares will dilute the percentage share of existing shareholders. To avoid this, current shareholders will have to take new shares to equalise the share.
Transferring existing shares
A new shareholder can also receive shares from one or multiple existing shareholders. This might be because a shareholder is stepping down from the company, for retirement or insolvency reasons. Unlike when issuing new shares, the transfer of existing shares won’t impact the percentage share of all shareholders, only the one(s) who are transferring the shares.
Existing shareholders must agree to transfer shares to new shareholders, and this is done by filling out a Stock Transfer Form via HMRC.
Legal and regulatory considerations
So, you’ve decided to appoint a new shareholder for your limited company – what are the legal considerations? Here’s a rundown of the regulatory requirements for new shareholders.
Fill out a stock transfer form
If you are transferring existing shares to a new shareholder, the first step is to fill out the Stock Transfer Form. It will only be submitted to HMRC if Stamp Duty is required.
Issue share certificate
The next step is to issue a share certificate to new shareholders detailing their shares in the company. Existing Crunch customers can use our on-demand accountancy services for support if required.
Update Companies House
A company needs to inform Companies House of the appointment of any new shareholders. You can do this via your annual Confirmation Statement, which should be submitted 14 days before the end of your review period this year.
Updating shareholders' agreements
The new shareholders must sign a deed of adherence to the existing shareholders' agreement. This legal document will bind the new shareholders to the same obligations and rights as the existing shareholders.
Pre-emption rights and share restrictions
If there are newly available shares, existing shareholders have first refusal before a new shareholder can buy them - this means a new shareholder must have the support of all shareholders before they enter the business, protecting the company from outside investors without shareholder backing.
Other share restrictions include the sale of restricted shares, which are held until certain conditions are met, or share transfer restrictions, which might impact the internal trading of shares.
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Common challenges and how to address them
Adding a new shareholder to a limited company is not always straightforward, especially when you have many different shareholders and each has their own interests to protect. You need to ensure that all shareholders share the same vision for the business and can agree on the benefits of adding the new shareholder.
Here are some common challenges you may encounter when adding a new shareholder, with some suggested ways to help avoid disputes:
Adding new shareholders: a quick summary
In this article, we’ve covered the most common ways to add a new shareholder, including common challenges and the technicalities of the paperwork.
Before you decide what to do, here are the main considerations:
Issuing new shares vs selling existing shares?
Raising share capital (new shares) is a great way to incentivise investors, but it will result in the dilution of existing shareholders’ percentage share. Selling existing shares is more common when a shareholder steps down, or you choose to bring in another shareholder without wanting to allot new shares.
Telling HMRC about a new shareholder
If you are selling existing shares, you need to fill out and submit a Stock Transfer Form to HMRC (if there will be Stamp Duty). You will also need to include any information about new shareholders in your annual Confirmation Statement submitted to Companies House.
Offering employees shares
You can incentivise employees by offering them shares via an employee share option scheme - read our guide to learn more.
Managing investments, cashflow, and meeting Companies House deadlines
The administrative side of shareholder management can be a burden, especially in small companies where the shareholders are also directors involved in the day-to-day management of the business. The best way to save time and resources, while also ensuring compliance and accuracy, is to work with an experienced accountant.
At Crunch, we provide limited company accounting software with expert on-demand advice from qualified accountants, so you can rest easy knowing you’re getting the best support in all aspects of your business finance.
Want to chat with one of our knowledgeable team about adding a shareholder and what that means for your business?
