How to Issue Shares in Private Limited Company?

Raising capital is often the lifeblood of any growing business, and for private limited companies, issuing shares is one of the most powerful tools available to fuel expansion, attract new talent, or bring in strategic investors. Unlike a sole proprietorship or a partnership, private limited companies have its own rights: they can issue shares in exchange for funding easily, all while protecting both the company and its investors through limited liability.

What is a private limited company?

A private limited company is a type of business entity that can be set up and run by any entrepreneur. The company ownership is split into shares that are owned by the shareholders of the company. The company has to pay corporate tax on the profits, and the remaining profits are then distributed to the shareholders.

The people who operate a private limited company are known as directors or company officers and are responsible for managing the company. These people can be hired by the company shareholders or can be the shareholders themselves. A private limited company usually has at least one director and it is normal for the company owner to be the director of the company.

Issuing Shares in Private Limited Company

When a private limited company is set up, the first shareholder chooses how many shares a private company can issue. But as per the government, there is a minimum requirement, where the company has to issue at least one share in the company.

So when you register a new company, you can choose the number of shares you want. It would also be based on your plan in the future to raise funding from investors in exchange for company shares. Initially, if you are setting up the company on your own, you can just issue one share to yourself.

This one share would represent the whole company, making you the 100% owner of the company. On the other hand, you may want to issue more shares to yourself, or to other people if you are opening your business with more partners. Usually, even numbered shares are preferred, such as two, four, 20, 100, etc. It makes it easier to get the percentage of ownership of each shareholder then. This percentage then helps in understanding the amount of company profits each person receives.

Steps to issue shares in a private limited company

If you are about to issue shares in a private limited company, you need to follow some rules. 

Here we listed six steps, several steps and legal requirements for issuing new shares in a private company:

Rights for the ordinary shares in a private limited company, come with:

• Capital distribution rights: Each share has the right to get the distribution made from winding up the company. In short, the shareholder has the right to a share of all the assets and money based on their percentage of ownership when the company is being wound up.
• Dividend rights: Each share has the right to dividend payments or any other distribution in the company. This means that the shareholder has the basic rights to get a percentage of the company’s profits in relation to each of their shares.
• Voting rights: Each share has the right of one vote in any circumstance of the company. This means that the shareholder can cast one vote for each share they own on important matters in the general meetings.

Practical Tips

• Consider using a professional service to ensure compliance.
• Ensure proper valuation of shares, especially if issuing to related parties.
• Document all decisions and maintain proper records.
• Consider shareholder agreements to clarify relationships between shareholders.

Types of shares issued in a private limited company

There are many different types of shares in a private limited company, also known as classes of shares, and come with different rights. These include:

• Ordinary shares: This is a kind of share that has no restrictions or rights to it. Each share offers equal rights to the shareholders of the company. They also come with the right to receive dividends and the right to share in any remaining assets or capital when the company is being wound up.
• Preference shares: These shares do not have the right to vote in the general meetings. This has the right to preferential treatment when the dividends are paid out. The preferred shareholders would get a fixed dividend sum. This is great for investors especially when the company is undergoing a lot of financial difficulties.
• Cumulative Preference shares: This share has the right where the unpaid dividends of one year can be carried forward to the next year and so on. If a shareholder misses a dividend in one year, they would get the missed amount along with the next year’s dividend. Just like preference shares, these shares do not have the right to vote in general meetings.
• Non-voting shares: As the name suggests, these shares do not come with the right to vote in general meetings. This share of a private limited company is normally given to family members or the employees in the company as compensation along with their earnings. It is a great way since companies do not want their employees to be able to vote on any important matters in the company.
• Redeemable shares: Redeemable shares are those that the company can buy back at some point in the future. The date on which they can be bought can be fixed earlier or can be in response to a specific event. This type of share is often issued to directors with the provision that they will be redeemed if and when the director leaves the company.
• Management shares: Management shares have additional voting rights with them. This includes having 5 votes per share or even 15 votes per share. This is usually given to the main shareholders of the company, allowing them to retain most of the control and power in the company.

FAQs

Here, you’ll find detailed answers to common questions about issuing shares:

What are the tax implications for companies issuing new shares in a private limited company?

The tax implications for companies issuing new shares can vary depending on the specific circumstances and jurisdictions involved. Income Tax Implications, Capital Gains Tax (CGT), Pre-emption Rights and Shareholder Approval, Documentation and Compliance, Specific Jurisdictional Considerations, Professional Advice

What documents are required to issue shares in a private company?

Documents required to issue shares in a private company are Share Allotment Forms, Share Certificates, Articles of Association, Additional Agreements or Contracts, Audited Financial Statements, and Compliance with Regulatory Filings

What are the common reasons companies issue new shares?

Companies issue new shares for several common reasons, including Raising Capital, Attracting and Retaining Employees, Acquiring Other Companies, Increasing Liquidity, Maintaining Control, Diversifying Ownership, Gifting Shares, and Allowing Early Investors to Cash Out.

What happens if existing shareholders have preemptive rights when new shares are issued?

They are given the first opportunity to purchase these new shares before they are offered to outside investors. This process protects the shareholders’ ownership stakes, voting rights, and profit entitlements from being diluted.

Issue and Manage Your Company Shares on Eqvista

Issuing shares in a private limited company is an important step for raising capital and managing ownership, but it requires careful compliance with legal procedures and proper record-keeping. To simplify this process, Eqvista offers a platform that allows you to issue shares electronically, manage your cap table, and maintain compliance all in one place. 

Whether adding new shareholders or issuing different types of shares, Eqvista’s user-friendly app supports your company’s growth while keeping your equity management transparent and efficient. Contact Eqvista today– Make smarter equity decisions with ease.