If you’re running a company, one of the most important things you’ll want to understand is how shares work.

For some companies, shares will be allocated evenly among owners. Other companies will split up shares, so that some owners own more of the company than others.

A common question that is asked in this situation is, “How many shares can a company have?”

In this article, we’ll go through the answer. But first, let’s consider how shares actually work

How Do Shares Work In A Private Company?

When a company is set up, the capital of the company will be divided into shares. Each share is a unit of ownership of a company.

Shares can be owned by an individual or a legal entity (like another company, or a trust). Shares can also be jointly owned by one or more individuals.

There are two common ways in which a person or entity acquires shares.

Firstly, they may acquire shares through a share issue. This is when a company creates new shares and gives them to a person or entity. Share issues happen when the company is first set up, and can also happen at any time afterwards when the company decides it wants to raise additional investment by issuing shares in exchange for money.

Secondly, shares may be acquired through a share sale. This is where an existing owner of shares in the company (a ‘shareholder’) decides to sell their shares to a third party. In this scenario, the parties would need to enter into a Share Sale Agreement, recording the details of the sale are in writing.

When an individual or entity owns shares in a company, they have certain rights in the company. The specific rights they have depend on the Company Constitution and Shareholders Agreement of the company, but usually shares will entitle the holder to receive a percentage share of profits of the company, or a percentage of proceeds if the company is sold or acquired, as well as the right to vote on certain decisions of the company. The percentages usually correspond to their percentage ownership of the shares in the overall company.

How Many Shares Can A Company Have?

The exact number of shares that a company has is determined at the time the company is set up, but may be adjusted over time. The number of shares that the company has doesn’t matter as much as the percentage ownership of the company held by each shareholder, and it is up each company to determine how many shares it wants to have.

It is common for small businesses to issue 12, or some multiple of 12 e.g 1200, shares at incorporation, as this is an easy number to divide many ways (e.g. halves or quarters). For startup businesses that intend to raise investment and have a high number of shareholders, they may wish to create many more shares (e.g. 1 million or 10 million) as it gives more flexibility to issue smaller and larger holdings. Ultimately, the best number depends on the specific situation and the number of shareholders the company expects to have in the future.

If a company has a low number of shares, but wishes to increase the number of shares so that they can more easily divide up shares amongst shareholders, they can undergo a ‘share split’ under which they increase the number of shares each existing shareholder has (e.g. a 10x share split would turn 10 shares into 1000 shares).

While there is no limit on the number of shares a company can have, there is a limit on the number of shareholders a private company can have. A private company should not have more than 50 shareholders.

How To Issue Shares

The way a company issues shares will depend on both their governing documents and the Corporations Act 2001. This is because the Company Constitution would set out the process for issuing shares, but if this doesn’t apply or it isn’t valid, the rules set out in the Corporations Act apply. 

Can Directors Also Be Shareholders?

We’ve discussed how many shareholders you should have in a company, but can directors also be shareholders?

The simple answer is yes, a director can be a shareholder. This would need to be made clear in the company’s governing documents, as well. 

Do I Need A Shareholders Agreement?

If you’re issuing shares as a company and there are more than one shareholder, then we’d recommend you strongly consider putting a Shareholders Agreement in place. It’s an essential document which covers many important matters – including the rights and responsibilities of shareholders, what happens if shareholders want to sell their shares to, and how disputes are managed.

Key Takeaways

In general, there is no limit to how many shares a company can have, and the specific number of shares a company should have will depend on the number of shareholders and the way in which the company intends to divide up it’s ownership. When considering issuing shares, companies should refer to the relevant governing documents and the Corporations Act 2001 to ensure correct processes are following.

If you would like a consultation on managing shares in a company, you can chat with our Corporate Lawyers to discuss your options. Alternatively, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

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