Selling company shares are a great way to raise capital for a business that is ready to expand but lacks the finances, or you can use the quantity of shares held to pay out dividends to your shareholders. The traditional ‘ordinary shares’ allow only one rate of dividends to be paid out and all stakeholders have the same voting rights. 
 
Alphabet shares are so called due to being identifiable by a specific letter, e.g. ‘A shares’ or ‘B shares’. These types of shares are ideal for companies who are family owned or for joint ventures that want to issue shares to their employees, company directors and family members. With alphabet shares you can assign your shareholders with a different class of shares each, such as non-voting shares, or you can vary the rate of dividends paid. 

Different rates of dividends 

Paying dividends, instead of a monthly salary, can be a more tax-effective way of paying the company director or shareholders an income. Issuing alphabet shares gives a company the flexibility needed to pay dividends that are not proportionate to the number of shares held by each individual. For example: 
 
'A ordinary shares’ are non-voting and are non-redeemable. 
'B ordinary shares’ allow the shareholder to vote on company matters and are redeemable at £1 per share. 
'C ordinary shares’ do not allow voting and are redeemable at £3 per share. 
 
You can issue as many variants as needed to enable the company to pay dividends at different rates per share, or where a particular right is given to a specific shareholder. 

When different types of shares are needed 

 
“Family” Company (great for small director-owned limited companies!) – issuing shares in a small family company enables the income from your company to be spread amongst family members, by issuing your parents, spouse, partner or children with shares. Using the alphabet share model, you can make the shares issued to each family member different, allowing you to pay differing levels of dividends and making them voting or non-voting. This is also beneficial for long-term tax planning reasons, because the issuing of new shares isn’t liable for stamp duty and there is no gift for inheritance tax purposes or capital gains tax. 
Issuing alphabet shares for your small limited company can be complex and there are important tax avoidance rules to be considered. Please ALWAYS seek specialist advice before proceeding. It is important you understand the implications involved and whether this is the right solution for you! 
Joint ventures – alphabet shares, issued as part of a joint operation between two or more companies, allow each of the joint owners/directors to have different rights and dividend values attached to their shares. 
 
Employees – you may want to reward your employees by issuing shares, or to enable you to pay them in the form of dividends instead of a salary. Shares issued in such a way can a tax-efficient way of paying your employees and such a scheme can also be used to incentivise employees to maximize the company’s profits. 

Things to note 

It’s important that your company’s Articles of Association identify what rights are attached to each class of your alphabet shares. If you fail to do this, your shares will be classed as ‘ordinary shares’, all with the same rights attached to them. 
 
Ensure that when using alphabet shares to pay dividends to employees, you have set the scheme up correctly and legally. If not done correctly, HMRC may considered it as a way to avoid tax or national insurance payments. 
 
Be aware that bringing in shareholders will dilute the existing share capital of your business. We recommend that you discuss the implications of raising capital via shares with your accountant before you start the procedure. 
 
If you’re in the market for a new accountancy firm who can advise you on alphabet shares, contact us to find out more. 
 
 
 
 
Written by: 
 
Nicola J Sorrell - 
Effective Accounting 
 
Founder | Xero Champion | IR35 Expert 
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