What are ordinary shares? Rights, voting and who should hold them (UK)

Most UK business owners do not know much about ordinary shares, and that gap can cost them control and money later on, especially when they take on business partners or investors. The short version: ordinary shares are the most common type of share, they usually carry the right to vote, to receive dividends and to share in capital on a winding up, and most companies start with nothing else. Here is what they are, what rights they carry and who should hold them.

What are ordinary shares?

In short, ordinary shares are the most common type of company ownership. They give you a piece of the business, a slice of it.

Think of it like buying a slice of pizza. Each ordinary share is one slice, and the more slices you own, the bigger your portion of the company.

Most UK companies start out with only ordinary shares, because they are simple, flexible and they work for most situations. Problems tend to arise not because ordinary shares are a bad choice, but because owners never think about whether a single class still suits them once other people come in.

What rights do ordinary shares have?

Ordinary shares give you three key rights: voting, dividends and capital distributions.

• Voting. Voting lets you have a say in important decisions. When a matter is put to the shareholders, you get to vote on it.
• Dividends. Dividends give you a cut of the company's profits. Once the company has turned a profit and paid corporation tax on it, what is left can be distributed as dividends to the shareholders who have the right to receive them.
• Capital distributions. This right protects you if the company is liquidated and its assets are sold off. If that happens, you receive a cut of the proceeds, a distribution from the capital of the company.

Those three rights are what make an ordinary share valuable. Other classes of shares are usually created by adjusting one or more of them.

Voting rights and management shares

One ordinary share usually means one vote. That is the default, and in a company where everyone holds ordinary shares, control follows the number of shares held.

But you can create different classes of shares that carry more than one vote per share. Management shares are the obvious example: a class held by the founders that carries enhanced voting rights so that they keep control of the company even after issuing shares to others. If keeping control matters to you, that is the route to look at rather than relying on always holding a majority of ordinary shares.

This is where owners who have not thought about shares get caught out. They bring in a partner or an investor, hand over ordinary shares because that is all the company has, and only later realise that they have handed over votes and a share of every dividend along with them. Deciding the structure before anyone else comes in is much easier than unpicking it afterwards.

Who should hold ordinary shares?

Ordinary shares are usually reserved for the founders. But in smaller and less complex companies they can also be used for investors, and even to incentivise employees. Each group wants them for a different reason:

• Founders use them for control. The votes attached to their shares decide how the company is run.
• Investors want them for capital growth. They are betting on the company increasing in value, and ordinary shares give them full participation in that growth.
• Employees receive them as incentives, so that they share in the success they help to create.

The important thing is to think about your goals first. If you want simplicity and full participation by all shareholders, then ordinary shares for everyone are perfect. But sometimes you need different classes of shares. Two common reasons are tax planning and retaining more control for the founders.

Alphabet shares and tax planning

My tip is to consider alphabet shares, in other words different classes of shares labelled A shares, B shares and so on, to increase your flexibility.

Alphabet shares let you treat different shareholders differently. The classic use is dividends: the company can declare a dividend on one class and not another, which is why they come up in tax planning. They are also the mechanism for giving founders a separate class with the control rights they want. If any of that sounds relevant, a single class of ordinary shares is probably not the right structure for you.

Next steps

Look at who holds shares in your company now and who is likely to in the next few years. If it is just the founders and you want everyone treated the same, ordinary shares are fine. If you are bringing in investors, giving shares to employees or want to plan dividends and control more carefully, speak to a corporate solicitor about creating different classes of shares. For the mechanics, see how to create different classes of shares, and for how ordinary shares compare with preference shares see ordinary shares vs preference shares.