What are company shares?
A limited company must have at least one share which is a piece of the company. Just like cutting a cake into slices, these shares are essentially like segments of a whole which mean owners are then able to own ‘pieces’ of a company. For example, if a company has only one share, the owner of that share then own 100% of that company. If the company has two shares, each owned by separate people, they both own 50% of that company.
When forming a limited company we recommend creating either 100 or 1,000 shares to allow for selling or transferring shares more easily if ever required.
Generally Ordinary A shares created when setting up a company have equal voting rights and rights to dividends (payments of company profits to the owners). So, if an individual owned 60% of the company shares, he/she would have ultimate control of the company (60% of the votes) and be entitled to 60% of the dividends when they are declared.
Sometimes company owners may want to add shareholders without voting rights and/or without the same rights to dividends. This is where alphabet shares come in.
What are alphabet shares?
The term ‘alphabet shares’ is commonly used to describe different ‘classes’ of shares denominated by a letter e.g. A shares, B shares etc.
As dividends are often used as the main source of income for company owners, many companies want the flexibility to pay dividends that are not proportionate to the ownership of the shareholder. This could be due to the owners having different individual tax brackets or circumstances.
Dividends are paid according to share ‘class’ which facilitates this flexibility. For example - a husband and wife who own a company, each holding 1 Ordinary A share, who wish to declare a company dividend of £100,000. With this structure they each must get £50,000 and pay the relevant personal income tax on this amount.
If instead the husband owned 1 A share and the wife owned 1 B share, then different dividend amounts could be paid for each class - so the husband may be paid £40,000 and the wife £60,000.
In addition, the B share may not have voting rights (non-voting shares) meaning the owner of the A share has full control of the company. Again, this allows for more flexible arrangements compared to companies with just one class of shares.