Implications of Share Value on Ltd Company Incorporation

[innovapps]

Hi,

I'm currently in the process of incorporating a company that has two directors. The only 'assets' will be us two directors who will be working full time without drawing a salary (not for too long I hope!).

What is the implication of issuing 1000 shares at £100 vs 1000 shares at £0.01? For example, if we were to sell the company in say 20 years for £10mil, will capital gains come into play?

On the other side, let's say the business folds and we go into liquidation. Does the initial share value play a role?

Many thanks,
Tony

[Philip Hoyle]

Don't stress about this kind of thing. Most people will set up their company with the default 100 shares of £1 each. If there are two of you, you'd each buy 50 shares by paying £50 each into the company and then you'd be equal shareholders. When you come to sell the shares, your capital gains will be whatever your share of the proceeds less the cost, i.e. your £50. Having more or less, or higher or lower value doesn't really change anything - you'd still own half each and still have paid just a nominal value for them. Having a large number of low value shares may be useful if you plan to give them to key employees in the future, so that you can give, say a manager, a handful of shares every year, which in reality are so diluted they're realistically worthless, but could be worth a decent amount if the company was sold for a huge amount many years down the line.

[Ray Coman]

You must have the authorised share capital to issue the shares. Check the articles of association. If you purchase a company 'off the shelf', it may have a default number of shares of, say, 1,000. I cannot think of any particular reason for increasing the authorised number of shares. It creates extra administration as I believe a resolution needs to be passed.

In principal you should pay the company bank for the shares when they are issued, although often this is treated as an amount owed to the company by you, without any remarkable consequence.

Good luck and I hope you manage the £10 million sale price, eventually.

[Ray Coman]

Quick, I must correct my earlier post, there is no longer any cap on the shares that can be issued from 1 October 2009.

[innovapps]

Thanks for your help, I will also get a copy of the Articles of Association.

Out of curiosity, if the founding directors are not actually compelled to pay the company bank for those shares, and since incorporation costs are fixed in the UK, what would prevent those directors from issuing 1000 shares at £1mil each? With such a high initial valuation it'd be very unlikely that there would be any capital gains if they sold.

[Ray Coman]

I would not advise this, as this could result in an overdrawn director's loan account, and result in severe tax penalties. In addition, you may need to justify the share price to HM Revenue & Customs Share Valuation. As the company does not have a trading history this valuation may deny a reduction in capital gains or an allowable loss.

Once sold the shares may well qualify for entrepreneur's relief and for each taxpayer the first £1 million of lifetime gains are taxed at an effective rate of 10%, where the relief is claimed.