Setting up a private limited company is a great way for entrepreneurs to start their own businesses. But what exactly goes into setting up such a company? One of the most important factors is understanding the different types of shares available when it comes to private limited companies.
What is a Private Limited Company?
A private limited company is a type of business entity that is owned by shareholders. The shares in a private limited company are not publicly traded on a stock exchange. Private limited companies are typically small to medium-sized businesses.
The main advantage of a private limited company is that it offers limited liability protection to its shareholders. This means that the shareholders are not personally liable for the debts and liabilities of the company. Another advantage of a private limited company is that it can raise capital through the sale of shares to investors.
Types of Shares in a Private Limited Company
There are four different types of shares that can be issued by a private limited company: Ordinary Shares, Preference Shares, Deferred Shares, and Founder Shares.
Ordinary Shares: Ordinary shares are the most common type of share. They give the shareholder the right to vote at shareholders’ meetings and to receive dividends.
Preference Shares: Preference shares give the shareholder the right to receive dividends before ordinary shareholders, but they do not have voting rights. However, preference shares typically do not come with voting rights, which means that shareholders will have limited input in company decisions.
Preference shares can be cumulative preference shares and non-cumulative preference shares. Cumulative preference shares entitle the shareholder to receive all missed dividends if the company fails to pay them out in any given year. Non-cumulative preference shares, on the other hand, do not accumulate missed dividends, meaning that shareholders will only receive dividends if they are actually paid out by the company.
Preference shares can be a good way for investors to get involved with a company without having to take on too much risk. However, it is important to remember that preference shareholders will likely have little influence over company decisions.
Deferred Shares: Deferred shares do not have voting rights and do not receive dividends unless the company is profitable. The key feature of deferred shares is that they do not have a fixed dividend and do not carry any voting rights.
Deferred shares are typically used by companies to raise capital without having to issue new equity or debt. They are also often used to incentivize key employees or directors, as they can be issued at a discount to the market price. However, because they do not have voting rights, they can also be used to dilute the voting power of existing shareholders.
Founder Shares: Founder shares are a special type of share that is given to the founders of a company. They typically have voting rights and may have special privileges, such as the right to purchase additional shares later.
The key features of Founder Shares are as follows:
- They are allotted by the company to its founders at the time of incorporation.
- The main purpose of issuing such shares is to provide an incentive for the founders to continue their association with the company.
- Founder Shares cannot be transferred to any other person and can only be held by the founders themselves.
- These shares typically have voting rights and are entitled to participate in the profits of the company.
Private limited companies have many different types of shares that can be issued to shareholders. Each type of share has its own set of rights and privileges, so it is important to understand the differences between them before deciding which type is right for your company. By taking the time to learn about these different types of shares, you can make sure that your company's capital structure reflects and supports its long-term goals and strategy.
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