What Are Ordinary Shares? A Legal Guide for UK Businesses and Startups

If you’re considering starting or growing a business in the UK, you’ve probably come across the term “ordinary shares.” But what are ordinary shares, why do they matter for founders and startups, and what legal points should you be aware of as you build your business?

Understanding ordinary shares is more than just knowing who owns what. It’s at the heart of how companies are controlled, how profits get shared, and how you can attract investment and grow confidently. Whether you’re launching your first startup, restructuring, or bringing in outside capital, getting your head around ordinary shares will help you avoid disputes and keep your venture legally secure.

In this guide, we break down what ordinary shares are, explain how they work, and walk you through the key legal considerations UK entrepreneurs need to know. If you’re not sure which structure fits your goals-or how to protect your interests as a founder or investor-keep reading!

What Are Ordinary Shares?

Let’s cut through the jargon: ordinary shares are the most common type of share issued by UK limited companies. When you hear someone talking about “company ownership” or “founder equity,” they’re usually referring to ordinary shares.

Ordinary shares (sometimes called ‘A ordinary shares’ or ‘ordinary A shares’ if there are different classes) represent a portion of ownership in a company. As a shareholder, you’re entitled to:

• Vote on company decisions (like electing directors or approving major sales)
• Receive dividends (if the company decides to pay them)
• Share in the proceeds if the company is sold or wound up

This is different from other types-like preference shares-which might come with fixed dividends or priority rights (but often without voting power).

If you’re setting up a new company or issuing shares to new founders or employees, it’s crucial to understand the rights and obligations attached to ordinary shares. The specifics for your company will be outlined in its Articles of Association and any shareholders’ agreement.

How Do Ordinary Shares Work in a UK Company?

Ordinary shares are typically issued when you incorporate your company with Companies House. Each share represents a slice of the company-think of it as splitting the ownership pie into parts. If you own 40 out of 100 shares, you own 40% of the business.

Key features of ordinary shares include:

• Voting rights: Ordinary shareholders usually have one vote per share at general meetings, influencing key company decisions.
• Dividend rights: You may receive dividends-periodic payments out of company profits-at the directors’ discretion.
• Share in surplus assets: If the company is wound up, ordinary shareholders have a right to any assets left after debts and other share classes are paid.

Many startups allocate ordinary shares to founders, early team members, and sometimes even investors (in early funding rounds). Some companies introduce multiple “classes” of ordinary shares (like ‘A ordinary shares’ and ‘B ordinary shares’), especially when negotiating different voting or dividend arrangements-but more on that soon.

Why Are Ordinary Shares So Important for Startups and Small Companies?

Ordinary shares are the foundation of most private limited companies in the UK. Here’s why they matter for founders and entrepreneurs:

• Ownership and control: They determine who calls the shots and what say each person has in day-to-day management and strategic decisions.
• Attracting investment: Ordinary shares are what most angel investors and early-stage VCs expect to receive when investing in your business.
• Flexibility and growth: You can issue more ordinary shares in the future to raise new funds or reward employees (through share options or incentive schemes).
• Legal protection: Shareholder rights-like protection against unfair dilution-are built on your shareholding.

If you’re planning to buy or sell shares, or bring on board new co-founders, you’ll need a robust legal process for share sales to make sure everyone’s rights are clear.

What Rights Do Ordinary Shareholders Have?

As an ordinary shareholder, you get certain legal rights under the Companies Act 2006 and your company’s constitution. These usually include:

• Voting rights on company matters (such as the appointment/removal of directors, major business changes, approving the company’s accounts etc.)
• Right to receive dividends (when declared by the directors)
• Right to attend general meetings and receive key company information
• Right to participate in distributions on a sale or winding up
• Right to buy more shares (pre-emption rights) if new ordinary shares are issued, to avoid being diluted

Remember, these rights can be adjusted or limited by the company’s Articles of Association or a bespoke shareholders’ agreement. It’s vital to have clear, tailored documents to avoid costly shareholder disputes down the track.

What Are A Ordinary Shares - And Why Create Different Classes?

You may have seen companies refer to ‘A ordinary shares’, ‘B ordinary shares’, or similar. So, what’s the difference? UK companies can create multiple share classes, each with their own rights. This is handy if you want to:

• Give founders, employees, and investors different voting or dividend entitlements
• Create non-voting shares for employee incentives
• Control who gets paid first (for example, preference versus ordinary shareholders on exit)

A ordinary shares are essentially ordinary shares with specific rights attached. For example, some startups issue ‘A ordinary shares’ to founders and ‘B ordinary shares’ to new investors, perhaps with differing dividend priorities or restricted voting power.

The way these rights work must be set out in your Articles of Association and made clear to Companies House. If you want to create new share classes (or change the rights of existing ones), you’ll need a formal shareholder resolution and updated legal documents-don’t try to DIY this part!

How Do You Issue or Transfer Ordinary Shares?

Whether you’re setting up a company, rewarding team members, or raising funds, you may want to issue new ordinary shares (or transfer existing ones). Here’s the general process:

1. Check your company’s constitution: Ensure your Articles allow for new share issues/transfers and check for any restrictions.
2. Decide how many shares to issue or transfer and to whom (founders, new investors, employees, etc.).
3. Prepare board and shareholder resolutions as needed, and update your statutory registers.
4. Update the register of members and file necessary forms with Companies House.
5. Have watertight legal documents-such as a share sale agreement or share subscription letter-to record and protect the transaction.

Incentivising staff with ordinary shares? You’ll want a clear incentive or EMI scheme to stay tax-compliant and avoid legal headaches. For more detail on this, see our guide to share option schemes.

Legal Risks and Common Pitfalls for Founders

Ordinary shares are straightforward in principle, but legal pitfalls abound if you don’t set them up properly. We see these common problems among UK startups and SMEs:

• Unclear share splits: Not documenting shareholdings correctly means founders can fall out, or investors can claim more than their fair share later.
• No shareholders’ agreement: Without this, disputes about decision-making, selling, or founder exits can turn costly fast. Always have a custom shareholders’ agreement in place.
• Ignoring legal formalities: Failing to issue proper share certificates, update registers, or file with Companies House can invalidate your share transfers or raise regulatory flags.
• Accidental tax issues: Gifting or underpricing ordinary shares to team members can trigger unexpected tax liabilities if not structured through a recognised share scheme.
• Neglecting minority rights: Failing to build in fair protections for minority or employee shareholders can invite future claims for unfair prejudice.

The right legal advice now can spare you major stress (and cost) later. Our team can help review or draft the essential documents so your ordinary shares are correctly set up for growth and future investment rounds.

How Are Ordinary Shares Taxed?

For most founders and investors, tax on ordinary shares comes down to two moments:

1. Receiving dividends: Dividend payments are subject to UK dividend tax (with a tax-free allowance). The company pays dividends out of post-tax profits.
2. Selling your shares: If you sell ordinary shares for more than you paid, you may face Capital Gains Tax (CGT) on the profit. There are reliefs available-like Business Asset Disposal Relief-for qualifying UK entrepreneurs.

You don’t usually pay tax for simply holding ordinary shares or for increases in the company’s value, unless you receive benefits (such as under an employee share scheme). For detailed advice here, speak to a qualified accountant or get in touch with our legal team to make sure your setup is tax-efficient.

What Legal Documents Do You Need When Issuing Ordinary Shares?

Don’t overlook the paperwork when it comes to ordinary shares. The key legal documents and steps include:

• Articles of Association: Sets out share classes, rights, and restrictions. Essential for all companies.
• Shareholders’ Agreement: The gold standard for preventing founder/owner disputes and clarifying what happens if someone wants to leave, sell, or disagree.
• Share Certificates and Register of Members: Official proof of ownership and required statutory records. Must be kept up to date.
• Share Subscription Agreement or Transfer Forms: Used when new shares are issued or current ones are transferred/sold.
• Board and Shareholder Resolutions: Formal approvals for share issues, transfers, and rights changes.

Avoid using generic templates or drafting them yourself-legal documents need to be tailored to your specific structure, business goals, and the rights you want each group of shareholders to have. Getting these documents drafted or reviewed by an expert will save you from future disputes and ensure compliance with UK company law.

Can You Change or Convert Ordinary Shares Later?

Yes, companies can convert ordinary shares or create new classes as the business evolves. For example, you may want to:

• Issue new ordinary shares to raise capital without diluting founders’ control (by introducing voting/non-voting shares)
• Offer preferred shares to new investors in later funding rounds
• Convert between classes (e.g. convert B ordinary shares to A ordinary shares)

Any changes usually require shareholder approval (sometimes a “special resolution” of 75%+), updates to your Articles of Association, and filings with Companies House. It’s best to get legal advice on amending your articles and preparing the correct paperwork.

Ordinary Shares vs Preference Shares: What’s the Difference?

Sometimes, investors or founders consider issuing preference shares instead of (or alongside) ordinary shares. Here’s the comparison, in plain English:

Ordinary Shares	Preference Shares
Voting rights (usually one per share)	Often no or limited voting rights
Dividends paid if/when directors declare them	Fixed dividend paid before ordinary shares
Last in priority if company is wound up	Paid out before ordinary shares on winding up
Common for founders, early employees, and some investors	More common for external investors or later-stage capital raising

Most startups begin with ordinary shares and might add preference shares later during funding rounds. Make sure all parties are clear what rights attach to each share class-this should be set out in your company’s Articles and formal share agreements.

Key Takeaways

• Ordinary shares are the default way to split ownership, voting rights, and dividends in a UK limited company. They’re essential for founders and startups.
• You can create “A ordinary shares”, “B ordinary shares”, or other classes to give different rights to founders, investors, and employees-but this needs careful drafting in your Articles of Association and share agreements.
• Key documents include your company’s Articles, a tailored shareholders’ agreement, share certificates, and statutory registers. Don’t rely on templates-a tailored approach is vital.
• Failing to track or document ordinary shares properly can cause disputes, legal problems, or missed investment opportunities. Investing in professional advice is worth it.
• Ordinary shares are taxed via dividends and capital gains rules. Structuring things right from the start makes a huge difference-especially for tax reliefs and employee incentives.
• It’s easy to get tripped up by technicalities or missing steps, especially as you scale. Good legal foundations now set you up for confident growth and less stress later.

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If you’d like expert legal advice on setting up ordinary shares, creating new share classes, or protecting your interests as a founder or investor, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.