A company’s ownership structure is a complicated matter that must consider several stakeholders’ interests. Many SMEs overlook the value of this structure when starting their company, which may cause problems later on, especially if shareholders’ objectives change.
No of the size of your firm, it’s crucial to set up a clear and organized ownership structure to ensure everyone knows their roles and how much influence they have over decision-making.
If shareholders disagree, failing to evaluate the best way to organize shareholdings might cause issues. Here, we outline the various configurations for directors and stockholders.
Who may own shares of stock?
A private company’s shareholders might be any individual or legal entity. A private corporation limited by shares must have at least one shareholder to be incorporated; however, there is no limit to the number of shareholders a business may have.
What does an investor do?
Shareholders often get a portion of the company’s earnings and a capital payout upon selling their shares. Unless they are directors or employees, they do not have duties related to the firm’s day-to-day operations.
Are shareholders and directors the same thing?
No, shareholders choose a director to run a company’s affairs. A shareholder owns a company through the purchase of shares. The dual role of shareholder and director is rather typical in small enterprises. Sometimes, a single individual will serve as the company’s sole shareholder and its only director.
What kinds of shares are there in a limited company?
Different kinds of shares may be allotted with varying ownership, restrictions, and privileges in enterprises where shareholders have contributed varying sums of time and money. Typically, they are
- Common shares
- Voting-free shares
- Shares of preferences
- revocable securities
Can ordinary shares be divided into various classes?
Ordinary shares may be divided into a wide variety of classes or designations, known as “alphabet shares,” which are often denoted by letters of the alphabet. Determining shareholders may be aided by several classes:
- A right to dividends
- Entitlement to vote
- Voting rights Capital on dissolution or disposal rights
Why is it necessary to have a variety of shares?
Different classes of shares may be weighted in a limited business based on what they can do for the owner. For instance, in certain circumstances, they may assist in obtaining the most tax-efficient return in the form of a dividend while maintaining the directors’ control over the casting of votes.
No predetermined form of share must be utilized. Small businesses often issue ordinary shares that are fully entitled to dividends, meeting voting rights, and the right to the division of the company’s assets in the event of a sale.
This kind of organizational structure is advantageous for smaller businesses with fewer shareholders or where shareholders are divided into distinct groups, such as a company with three groups of shareholders: the company’s founders, investors, and employees who have received shares as part of a compensation package. Each group will have a particular incentive in this kind of organization.
Using this technique, one class could be granted full rights while another could only be granted dividend rights and a share of any sale price.
Employee stockholders could benefit from this choice. Investors may want a role in general strategy, rights to dividends, and sale profits, but they don’t mind if the founders make most of the choices.
A knowledgeable and skilled legal advisor must carefully prepare and design changes to the rights affiliating shares.
Making use of a shareholders’ agreement
Another option to organize a shareholding is to draft a shareholders’ agreement, which might specify, for example, that certain actions need the consent of specifically identified owners or that more than a simple majority is required to make them.
Shareholder agreements may specify the process to be followed if the shareholders cannot agree on a major matter, helping to avoid a crippling impasse. The legally binding instrument may also impose limitations on the ability to sell shares, either to safeguard other shareholders or to prohibit the sale of shares to a buyer who may not act in the company’s best interests.
Board restructuring
It is crucial to give the board of directors the same amount of care as given to the structure of a company’s shareholders, focusing on what should happen in the event of a stalemate.
Choosing a permanent chairman with a casting vote is one option. Another is to specify that a certain director or committee of directors will be responsible for a particular choice or that the shareholders may only make some decisions. It is crucial that all directors be aware of developments inside the company; thus, if specific responsibilities are assigned to a director or committee of directors, it should be decided how often they will update the complete board.
Since every business is unique, there are several methods to set up a board of directors or a shareholder. The firm’s demands are always the most crucial factor to consider, especially when there are likely to be conflicting groups of shareholders with divergent interests.
Stephen Newman is head of corporate at Ramsdens Solicitors
