Types of Shares and How to Allocate Them

Classes of company shares

When a company issues shares, it can create different classes of shares with different rights attached to each class. These rights should be clearly set out in the company’s articles of association and reflected in the company’s statement of capital.

Shareholders may include founders, directors, investors, employees and family members. Different share classes can help a company balance control, dividend entitlement, exit rights and employee incentives. However, they should be structured carefully, as share rights affect voting power, tax treatment, investor protections and future funding rounds.

Ordinary Shares

Ordinary shares are the most common class of share in UK private companies. They usually carry voting rights, rights to dividends and rights to capital on a sale or winding up, although the exact position depends on the company’s articles and the rights attached to the shares.

In a simple company with one class of ordinary shares, voting power and dividend entitlement will usually follow the percentage of shares held. Where a company has more than one class of share, the rights may differ between classes and should be checked before shares are issued, transferred or offered to investors.

Not all ordinary shares carry the same rights. A company may create non-voting shares, restricted-voting shares or shares with different dividend rights, provided the rights are properly created and recorded.

Non-voting shares are sometimes used for employees, minority investors or family shareholders where the company wants to provide an economic interest without giving day-to-day control. However, shares issued to employees or directors can fall within the employment-related securities rules, and family share arrangements should not be presented simply as a way to avoid tax. The structure should have a genuine commercial basis and be reviewed for income tax, dividend tax, capital gains tax and inheritance tax consequences.

Preference Shares

Preference shares usually give the holder priority over ordinary shareholders for dividends, capital repayment, or both. They are often non-voting or restricted-voting, but this is not automatic. The rights must be set out clearly.

A preference dividend is often expressed as a fixed rate, but it is not the same as a guaranteed share of profits. Dividends can normally only be paid from distributable profits and in line with the company’s articles and share rights.

Redeemable shares are shares issued on terms that allow, or require, them to be redeemed at a later date, usually at the option of the company, the shareholder or both. They are not the same as an ordinary share buyback, although both can result in shares being returned to the company.

Redeemable shares can be useful where investors want a defined exit route, or where the company wants the option to simplify ownership later. However, the redemption terms must be properly documented and the company must follow the statutory rules on share capital, distributable profits and payment.

Management Shares

Management shares can be used to give founders, directors or senior managers enhanced control. This is usually done by attaching additional voting rights to a specific class of shares, such as weighted voting rights. Veto rights over reserved matters are also common, but these are often dealt with in the articles, a shareholders’ agreement, or both.

Care is needed when issuing shares to directors, employees or connected parties. Shares must not be issued at a discount to their nominal value, and issuing shares at less than market value can create tax and valuation issues, particularly where the recipient is an employee or director. For most growing businesses, these arrangements should be supported by updated articles, board and shareholder approvals, valuation advice and a shareholders’ agreement.

How should shares be allocated to directors, investors and employees?

The right allocation depends on what each person is contributing and what the company needs to protect. For founders and directors, the key questions are usually control, decision-making authority, dividend policy and what happens if someone leaves. For investors, the focus is often economic return, protection from dilution, access to information and exit rights.

A common approach is to keep full voting control with founders or key directors, while offering investors or employees shares with limited voting rights, restricted dividend rights, vesting conditions or redemption provisions. This can reduce the risk of future disputes, but only if the rights are clearly drafted.

Employee shares can be a useful retention tool, especially where a growing business cannot yet compete with larger employers on salary. However, employee share awards should be structured carefully. Tax-advantaged schemes such as EMI, CSOP, SAYE or SIP may be relevant, depending on the company and the employee group. Non-tax advantaged awards can still be used, but they may create income tax, National Insurance and annual ERS reporting obligations. Employers generally need to register relevant ERS arrangements and submit annual returns by 6 July following the end of the tax year.

When taking investment in return for shares, directors should consider not only the percentage being issued, but also the rights attached to those shares. A small percentage can still carry significant influence if it includes veto rights, preferential dividends, anti-dilution protection or enhanced capital rights.

Non-voting shares may allow a company to give investors an economic interest without handing over day-to-day control. However, many investors will expect some protections, particularly around major decisions such as issuing new shares, taking on debt, selling the business, changing the articles or appointing directors. These protections are usually dealt with in the articles and a shareholders’ agreement.

Share dilution

Share dilution happens when a company issues new shares, reducing existing shareholders’ percentage ownership unless they participate in the new issue. Dilution is often necessary when raising investment, creating an employee share pool or bringing in a strategic partner.

Directors should not treat dilution simply as a way to reduce someone’s influence. Existing shareholders may have statutory pre-emption rights, contractual pre-emption rights or consent rights under the articles or shareholders’ agreement. Before issuing new shares, the company should check director authority to allot, shareholder approvals, pre-emption rights, Companies House filing requirements and any investor consent provisions.

Directors must also check whether they have authority to allot shares. In some private companies with only one class of share, directors may have statutory authority unless the articles restrict it. Where there is more than one class of share, or where the articles require shareholder approval, the company may need specific authority under the articles or a shareholder resolution.

Any new share issue should be properly approved, recorded in the company’s statutory registers, reflected in share certificates and reported to Companies House within the required deadline.

Sharing the Burden

How much control you wish to hand over to directors and investors is for you to decide however, doing so is no easy task.

Whether you want to issue shares to investors for funding, to employees as incentives, or to family members as part of a wider succession or remuneration plan, professional advice is essential. Dividends are not simply “tax-free”. For 2026/27, individuals receive a £500 dividend allowance, and dividend income above the allowance is taxed according to the shareholder’s income tax band. The rates from 6 April 2026 to 5 April 2027 are 10.75% for basic-rate taxpayers, 35.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers.

The tax position will depend on the shareholder’s wider income, the rights attached to the shares, how the shares were acquired and whether the arrangement falls within employment-related securities, settlements, capital gains tax or inheritance tax rules.

For help understanding share classes, shareholder rights and the tax implications of issuing shares, speak to our team.

We are small business accountants with offices in London and Brighton. As ACA and ACCA qualified accountants and experienced business consultants, we provide tax, accounting and business advisory services for growing companies.

Talk to us today or get a quote online. You can also read our Guide to Shares and Shareholders for more detail on the issues covered in this article.