How Do Shares Work?

How Do Shares Work?

share-market

The most popular type of incorporation for companies in the UK is the limited liability company.

Who owns a limited company is determined by who owns the shares in the company. A share is analogous to “having your say” in the way a business is run, as well as taking rewards from the business. For example, the car showroom up the road may have two shareholders, each owning 50% of the shares. Theoretically, that means they have equal say in how the company is run and are entitled to take the same percentage of the profits.

The “limited liability” in the title refers to what happens if the company becomes insolvent.

Unlike with a sole trader who is liable for all of his/her company debts, a limited liability company will never pay more to the creditors of a failed company than the value of its shares. So, if the two shareholders in the car showroom had only issued two shares worth £1 each, the limit of the liability of the company – if it fails – is just £2.

Some companies only have one shareholder, but most have more than one. If there’s only one shareholder, they own the company outright and do not have to cooperate with other shareholders or directors to get their way.

If there’s more than one shareholder, like at our car showroom, it makes running the company easier in many cases. The workload can be shared and it’s always good to have someone there to talk about the future direction of the company rather than deciding it all on your own.

There are downsides to more than one person holding shares in a company. Before you go into business with anyone else, have a shareholder agreement drawn up. A shareholder agreement gives direction to every shareholder about how they should behave and what their responsibilities are, both in good times and bad.

Shareholder agreements provide a framework for:

• decision-making within the business (how many shareholders does it require for a decision to be carried?)
• what price a shareholder can sell his/her stake at and to whom in case s/he wishes to leave
• the amount of work and the areas of responsibility an individual shareholder has and what happens if the other shareholders feel that one is not pulling their weight?)
• protection of minority shareholders from unfair treatment
Just as with any marriage, any business partnership has their ups and downs. Most of the time, disputes can be resolved successfully. Without a shareholder agreement, picking apart a company where the shareholders have fallen out can destroy value in the business and sometimes the business itself.

Before you make the big leap, protect yourself and other new & future shareholders with a shareholder agreement because if it all goes wrong and it becomes personal between the owners, there may be no way back.

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