Share capital is the total nominal value of the shares in the company, such that a company with 100 ordinary £1 shares will have a nominal share capital of £100. This is not the same as what the shares are worth, which will depend on the value of the company. The company can issue different types of shares. Normally, a small company will issue ordinary shares and may choose to have different classes of ordinary shares (such as A ordinary shares, B ordinary shares, etc.). This structure, known as an alphabet share structure, is a popular structure, as it allows for different dividends to be declared in respect of different classes of shares, which can be very useful from a tax planning perspective. The company can also choose to give different rights to different classes of shares too. For example, the parents may have full voting rights, whereas children may be given shares with an entitlement to dividends only. However, where shares have restricted rights, this may compromise the availability of business asset disposal relief if the company is sold.

Practical tip Consider what share structure will work best for your family company, what rights you want individual family members to have and what flexibilities you wish to retain. Setting up an alphabet share structure at the outset preserves flexibility. However, when assigning rights and shareholdings, be mindful of the qualifying conditions for business asset disposal relief. The company could also issue preference shares, which have a fixed right to dividends and no voting rights, although these are less common in a simple family company. As well as deciding on the type of shares, the family needs to decide how many shares to issue and to whom. The authorised share capital places a limit on the number of shares that can be issued. The company does not need to issue all the shares that can potentially be issued – the shares that are issued form the issued share capital. The company can decide how many shares to issue, as long as this is within the authorised share capital. In a simple family company where there are only two shareholders, such as a husband and wife or civil partners, the company could simply issue one share each. This approach could be adopted whether they simply have one class of ordinary share or adopt an alphabet share structure. Alternatively, the company could issue 100 shares of each class, as this provides for an element of flexibility in holdings of a particular type of share, and this approach is often adopted by small companies. It should be noted that the shareholders must pay for their shares and, in doing so, introduce capital into the company. The amount of capital that the family wish to introduce will have a bearing on the number, class, and nominal value of the shares that are issued