Share Classes for Small UK Companies

Most small UK companies issue one thing: ordinary shares, all identical, and that's usually right. But there are a handful of situations — an inactive co-founder, a spouse on a different tax position, an investor who wants their money back before yours, a child being brought into the business — where a single class of shares forces you into a compromise you don't have to make.

This guide covers what a share class actually is in law, the four structures small companies most often use, and the filings that follow. It's the decision, not just the definitions.

What Makes a Share a Different "Class"

The test is narrower than people assume. Section 629(1) of the Companies Act 2006: "For the purposes of the Companies Acts shares are of one class if the rights attached to them are in all respects uniform."

"In all respects uniform" is the whole test. Change any right — voting, dividend, capital, redemption — and you have a second class. Change nothing and calling some shares "A" and others "B" doesn't create two classes in any meaningful sense; it just labels them.

There's one carve-out worth knowing, in section 629(2): rights are "not regarded as different from those attached to other shares by reason only that they do not carry the same rights to dividends in the twelve months immediately following their allotment." So a first-year dividend difference alone doesn't split the class.

The rights themselves come from your articles of association, or from the resolution under which the shares were issued — not from the share certificate. The unamended model articles don't set up any share classes, but they don't stop you creating one: article 22(1) lets the company issue shares "with such rights or restrictions as may be determined by ordinary resolution". It is often worth amending the articles anyway (by special resolution) so the class rights are written down in one place, and bespoke articles may require it.

The Three Rights Worth Separating

Almost every small-company share structure is a combination of decisions about three things:

Votes — does this shareholder get a say in decisions?
Dividends — do they share in profits, on what basis, and in what order?
Capital — what do they get if the company is sold or wound up, and in what order?

Ordinary shares carry all three equally. Every alternative structure is a deliberate departure from one or more of them.

Four Structures Small Companies Actually Use

Ordinary shares (the default)

Equal votes, equal dividends, equal capital. Right whenever shareholders are genuine equals who are all involved. Don't complicate this without a reason.

A and B ordinary shares (differential rights)

Two classes of ordinary shares with different rights — most often different voting rights, different dividend entitlements, or both. The classic uses:

A founder stays in control while someone else holds economic value. A shares vote, B shares don't, both share in dividends.
Different dividends for different shareholders. Two shareholders in different tax positions, or one active and one passive, can be paid different amounts without needing waivers — each class carries its own rate per share on the dividend voucher. Structuring this properly at the outset is generally cleaner than declaring an equal dividend and then arranging a dividend waiver each time.
Bringing in family members with economic participation but no voting control.

A word of caution: differential dividends between spouses or family members can attract HMRC attention under the settlements legislation, particularly where value is shifted from a higher earner to a lower one without a genuine commercial reason. The concept HMRC applies is "bounty" — its manual on the closely-related dividend-waiver case describes it as the shareholder having "indirectly provided funds for an 'arrangement' or 'settlement'", with spouse/civil-partner cases caught by ITTOIA s.624 and minor-child cases by s.629. That page addresses waivers rather than share-class design, so treat it as the reasoning HMRC brings, not a ruling on this structure. Get tax advice before structuring a family split — this is where the risk concentrates. For an outright transfer rather than a new class, see gifting shares to a spouse.

Preference shares

Shares with a prior right to dividends — typically a fixed percentage, paid before any ordinary dividend — and often a prior right to capital on a winding up. Usually non-voting. Used where someone wants a predictable income and priority rather than upside and control.

Two points people miss. A preference dividend is still a dividend: it can only be paid out of distributable profits, so "fixed" doesn't mean guaranteed. And whether unpaid preference dividends accumulate is a drafting choice — cumulative preference shares carry the arrears forward, non-cumulative ones don't.

Redeemable shares

Shares the company can buy back on pre-agreed terms — an exit built into the structure from the start. Useful for a fixed-term investor, or an employee shareholder whose shares should return to the company when they leave.

The terms of redemption must be set out before the shares are issued, and redemption is funded from the same restricted sources as a buyback: distributable profits or the proceeds of a fresh issue of shares — or, for a private company, out of capital under the procedure in Chapter 5 of Part 18 of the Act (s.687). If redeemable shares aren't already in place, the equivalent route is a share buyback, which needs shareholder authorisation of the contract at the time.

Creating a New Class: The Sequence

Four steps, in this order.

1. Fix the class rights. The rights of the new class must be settled before the shares are allotted. Either amend the articles — a special resolution (at least 75% of the votes: of the total voting rights of eligible members on a written resolution, or of the votes cast at a meeting), with the amended articles filed with Companies House within 15 days — or, if your articles include model article 22(1), pass an ordinary resolution setting out the rights. It is often worth amending the articles anyway so the rights are recorded in one place.

2. Allot the shares. The directors need authority to allot, and if the new shares are being issued to some shareholders and not others, existing shareholders' pre-emption rights need to be disapplied or waived. The mechanics are in our guide to the allotment of shares and SH01.

3. File the SH01. The return of allotment, with a statement of capital showing every class, its nominal value, and the rights attached.

4. Notify the class designation. Where a company assigns a name or designation to a class of shares, section 636 requires that it "must within one month from doing so deliver to the registrar a notice giving particulars of the name or designation so assigned." The form is SH08.

Then update your own records: the register of members must show which class each holding is, and every share certificate must state the class.

Changing the Rights on an Existing Class

Different — and harder — than creating a new class, because you're altering what someone already holds.

Section 630 governs variation. Rights may be varied in accordance with provision in the articles for varying them; where the articles contain no such provision, the holders of that class must consent. Section 630(4) sets the threshold: either "consent in writing from the holders of at least three-quarters in nominal value of the issued shares of that class (excluding any shares held as treasury shares)" or "a special resolution passed at a separate general meeting of the holders of that class sanctioning the variation".

Two details in that section that catch people:

A separate class meeting. The 75% is of that class, at a meeting of that class — not a general meeting of all shareholders. A single 75% vote across the whole company does not satisfy it.
Amending the variation provision is itself a variation. You can't loosen the mechanism first and then use the looser mechanism. And "variation" includes abrogation — removing a right entirely.

Then file. Section 637: "Where the rights attached to any shares of a company are varied, the company must within one month from the date on which the variation is made deliver to the registrar a notice giving particulars of the variation." The form is SH10.

Note the two sections do different jobs and are easy to swap: s.636 is the class name or designation (SH08); s.637 is the variation of rights (SH10). Both carry a one-month deadline.

When a Second Class Is Probably Not the Answer

Multiple classes add permanent complexity to every future dividend, transfer and filing. Some situations look like a class problem and aren't:

A one-off unequal dividend. A waiver or a differently-timed dividend may be simpler than restructuring.
Rewarding an employee. Share incentive arrangements have their own tax rules; an ad-hoc new class is rarely the efficient route.
A shareholder you don't want voting on one specific decision. Sometimes a shareholders' agreement handles this better than a new class.
A sole director and sole shareholder. There is nothing to separate.

Key Takeaways

Shares are one class only if their rights are "in all respects uniform" (s.629(1)). A first-year dividend difference alone doesn't split a class (s.629(2)).
Rights come from the articles, or the resolution the shares were issued under, not the certificate. Unamended model articles let you create a new class by ordinary resolution (art 22(1)).
The three separable rights are votes, dividends and capital. Every structure is a choice among them.
Creating a class: fix the rights (special resolution amending the articles, or an ordinary resolution under model article 22(1)) → allot → SH01 → SH08 within one month where you assign a name or designation to a class (s.636).
Varying an existing class: articles route, or 75% in nominal value of that class in writing, or a special resolution at a separate meeting of that class (s.630(4)) → SH10 within one month (s.637).
Family dividend splits via differential classes carry settlements-legislation risk. Get tax advice first.

How CompanyMinder Helps

CompanyMinder records a share class against each register entry, so your register of members shows which class each holding is in (a shareholder with two classes has an entry for each), and when you generate a share certificate and pick the holder from the register, the class is filled in for you. When you record an allotment or transfer, the member's holding updates from the event, and transfers are checked to stay within one class — which matters more once there are several classes, because that is exactly when hand-maintained records start disagreeing with the statement of capital on the public register. When allotting a class someone doesn't already hold, first add a register entry for them in that class with 0 shares, then record the allotment against it — the allotment adds to whatever the entry already holds.

A Note on Scope

This is general guidance based on the published Companies Act 2006 and current Companies House forms. Share-class design has significant tax consequences — settlements legislation on family dividend splits, employment-related securities rules on shares issued to employees, and capital-gains treatment on redemption or buyback — and the drafting of class rights in the articles, or the resolution the shares were issued under, determines what you can actually do later. Take advice from an accountant and, for the drafting, a solicitor before creating or varying a class. It is not legal or tax advice.