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When you’re growing your company and thinking about raising capital, you’ll likely come across terms such as ordinary shares and preference shares. Understanding the difference between these two types of shares is crucial – not just for compliance with the Corporations Act 2001, but also for making the right decisions for your business’s future.
Whether you’re planning to reward early investors, bring in new partners, or put together a share structure that appeals to backers, knowing the key distinctions between ordinary and preference shares will give you an edge. Yet, just reading about “fully paid ordinary shares” or “what are preference shares” can get confusing pretty quickly – especially with all the legal and financial jargon.
The good news is that you don’t have to figure it out on your own. In this guide, we’ll walk you through the core concepts, practical differences, and important legal considerations around ordinary versus preference shares in Australia. We’ll also outline best practices for protecting your interests (and your investors’), answer common questions, and highlight the rights and risks attached to each share type. If you’re thinking of raising capital, restructuring your ownership, or just setting up a company with co-founders, keep reading.
What Are Ordinary Shares?
Let’s start with the basics: ordinary shares (sometimes also called “common shares”) are the standard type of share most Australian companies issue when they start out. If you’re the founder or a co-founder, it’s highly likely you’ll receive ordinary shares as recognition of your ownership in the business.
Holding ordinary shares usually means you have:
- A right to vote on company matters, including at Annual General Meetings (AGMs)
- The right to receive dividends (if and when declared by the company)
- A claim on company assets if the business is wound up – after all debts and other obligations are paid
Ordinary shares give holders broad rights but generally don’t offer any special treatment. They are fully paid ordinary shares if the holder has paid the total issue price and has no further liability to contribute funds.
For most startups and small businesses, all initial shareholders hold ordinary shares. As the company grows, you might consider issuing additional shares or alternative types to suit new investors or special situations.
What Are Preference Shares?
Preference shares are a special class of shares that, as the name suggests, offer certain “preferences” or advantages over ordinary shares. These preferences are set out in the company’s constitution or in the terms of the share issue, and may include:
- Priority when it comes to receiving dividends (for example, a fixed rate dividend paid before any dividends to ordinary shareholders)
- Priority over ordinary shareholders for repayment if the company is wound up
- Sometimes, a right to convert into ordinary shares at a future date (“convertible preference shares”)
- Other special conditions as negotiated (such as redemption by the company at a set date, or additional voting rights in some circumstances)
The goal with preference shares is often to attract outside investors – such as venture capitalists or sophisticated investors – by decreasing their risk and increasing their potential reward in comparison to ordinary shareholders.
However, preference shares don’t always come with voting rights. In fact, unless specified otherwise, preference shareholders usually have limited or no voting power, or only vote on certain matters, which sets them apart from ordinary shareholders.
What Is the Key Difference Between Ordinary and Preference Shares?
So, what’s the real difference between ordinary shares and preference shares? In simple terms: it comes down to rights and priorities.
Ordinary shares provide:
- Full voting rights on company decisions
- Equal dividend rights (after preference shares, if any, are paid out)
- Risk and reward that “rides” with the company
Preference shares are designed to:
- Offer priority for dividends (they get paid first, often at a fixed rate)
- Offer higher priority for return of capital if the company is wound up
- Sometimes convert into ordinary shares if certain triggers are met
- Often involve limited or no voting rights
To sum it up: ordinary shareholders control the company and, if the business takes off, can gain the most – but also take the most risk. Preference shareholders, meanwhile, are shielded to some degree, receiving priority returns but usually surrendering (at least some) decision-making power.
Both types serve their purpose in company structuring and capital raising in Australia. The important thing is to choose the structure that matches your business’s goals and your investors’ needs.
Why Does Share Structure Matter for Your Business?
Your company’s share structure affects everything from who makes key decisions, to how profits are distributed, to how attractive your business appears to investors.
Getting your share structure right can:
- Help smooth out co-founder relationships
- Make it easier to raise funds from investors or attract talent with equity
- Clarify what happens if someone wants to exit or sell their shares
- Minimise legal disputes about ownership, dividends, or control
If you’re not sure how to approach share structure, learn more about allocating shares in a startup, or speak with a legal expert early on.
Fully Paid Ordinary Shares Explained
You’ll often hear about “fully paid ordinary shares” – but what does that really mean?
If you are issued shares in exchange for cash or another form of contribution (for example, bringing expertise or assets into the business), those shares may be “fully paid” once you have met the full payment required by the company (as set out at the time of issue). This means you have no further financial liability on those shares.
In contrast, “partly paid” shares are shares where the shareholder still has to pay the rest of the amount owing on those shares if called upon by the company. For most startups and growing businesses, issues of partly paid shares are rare – fully paid ordinary shares are much more common because they’re simple and clear for everyone involved.
Having fully paid shares protects you from any unexpected claims for more money from the company, as your financial commitment is clear and final.
Key Legal Requirements When Issuing Shares
Deciding to issue either ordinary or preference shares involves legal and compliance steps. Here’s what you need to keep in mind:
- Company Constitution: This is the legal document that sets out the types of shares your company can issue and the rights attached to each. Changing or issuing new share types (especially preference shares) often requires passing a special resolution with shareholder approval. Read more on company constitutions here.
- Shareholder Approval: You’ll need existing shareholders to approve the issue of new shares, particularly if their own rights or dilution of voting power is affected.
- ASIC Notification: New share issues must be reported to the Australian Securities and Investments Commission (ASIC) within 28 days. This keeps your company records up to date and avoids financial penalties.
- Clear Legal Documentation: Use detailed Shareholders Agreements, share certificates, and company register entries. These define the rights, obligations, and processes for all parties and help avoid future disputes.
- Compliance with the Corporations Act 2001: Ensures your share issues and rights attached comply with Australian law – this is not optional.
For most growing businesses, working with a legal expert early is the best way to structure share issues to avoid mistakes that are hard to undo.
When Would You Use Preference Shares?
There are many reasons Australian businesses opt for preference shares as part of their growth strategy:
- Raising Capital: Investors (especially venture capitalists or “angel” investors) often want preference shares to protect their downside risk. A typical preference share might give the investor a fixed dividend and return of their funds before ordinary shareholders if things go wrong.
- Employee Incentives: Sometimes used as part of ESOPs (Employee Share Ownership Plans), especially when tailored incentives are needed for senior staff.
- Strategic Partnerships: Bringing in a new partner who wants to invest but isn’t interested in day-to-day control, or wants their investment “ring-fenced” in some way.
- Refinancing or Restructuring: Used to resolve complex disputes or recapitalisations by giving some shareholders special rights to encourage their participation.
Before creating preference shares, check your constitution and speak with a lawyer. Not every share class will suit every business, and poorly drafted terms can cause trouble down the track.
How Do You Decide Which Option Is Right for You?
Choosing between ordinary and preference shares depends on your business’s stage, growth ambitions, and who you want to attract as investors or co-owners. Some things to consider include:
- How much control are you comfortable sharing? Ordinary shares give their holders a say in company decisions.
- Do you want to attract investors with lower perceived risk? Preference shares can sweeten the deal for those cautious about the risks of a startup or early-stage company.
- Are you setting up for fast growth or a potential exit (like a sale or IPO)? The right share structure can make your company more attractive and competitive at fundraising time.
- What’s in your constitution and what are your current shareholders’ expectations? You may need approval or change your documents before issuing new share classes.
If you’re unsure which route to take, a legal health check can help you assess the best structure for your needs.
What Legal Documents Will You Need?
Getting your share structure right is only part of the set-up. You’ll also need key legal documents to protect you and your investors. These include:
- Shareholders Agreement: Outlines the rights, obligations, and processes for all shareholders – including how you run the company, manage disputes, handle exits, or allocate profits. Read more about Shareholders Agreements here.
- Company Constitution: Defines the classes of shares, voting rights, dividend policies, and how you deal with preferences.
- Share Certificates: Proof of ownership for each shareholder.
- Board Resolutions: Official decisions by the directors to approve and record new share issues.
- ASIC Filings and Company Register Updates: Required updates to keep your company records current and compliant with the law. Read about updating company details with ASIC.
- Legal Advice on Offer Documents: If raising capital from the public or sophisticated investors, you’ll also need information memoranda or prospectuses, complying with financial services regulations.
Don’t rely on generic templates – these documents should be customised for your unique business and investor situation.
Australian Legal Steps for Share Issues
When you’re planning to issue ordinary or preference shares, here’s a practical roadmap to help you stay on track and out of trouble:
- Review Your Constitution and Shareholder Agreements: Check what classes of shares can be issued and whether you need to amend existing documents.
- Get Shareholder Approval: Especially important if introducing preference shares or changing the rights attached to any share class.
- Draft (or Update) Legal Documents: Prepare clear agreements for both new and existing shareholders. Tailor these to spell out rights and obligations (especially around dividend rights, voting, and liquidation priorities).
- Issue and Register New Shares: Record all new share issues in your company register, issue share certificates, notify ASIC, and update your cap table.
- Stay Compliant with Ongoing Obligations: File your annual ASIC review, maintain up-to-date records, and fulfil financial reporting if required. Learn more about ongoing compliance here.
If you’re not sure where to start, Sprintlaw can help you set up the right company and share structure or review your existing documents for peace of mind.
Common Mistakes to Avoid
Setting up shares is a complex process. Here are some common traps and how to avoid them:
- Issuing preference shares without proper authority: Your constitution must allow it, and you may need a special shareholder resolution.
- Unclear or missing shareholder agreements: This is a recipe for disputes and costly litigation down the track.
- Failing to clearly document all the terms of preference shares: Specify everything, including how dividends are calculated, what “preference” really means, whether the shares convert, and the voting arrangements.
- Not filing the right forms or updating ASIC records: ASIC fines can be costly and missing documentation can void your share issues.
- Issuing partly paid shares without explaining the risks: Make sure shareholders understand any future liability.
The best way to avoid these issues is to get professional help from the start – don’t try to cut corners with your capital raising or share structure.
Key Takeaways: Difference Between Ordinary and Preference Shares
- Ordinary shares are the default ownership class in most Australian companies, offering voting, dividends, and residual rights.
- Preference shares give their holders special rights (such as priority for dividends and capital), but often restrict or exclude voting power.
- Your company constitution and shareholder agreements must clearly set out the rights of each class – don’t rely on generic templates.
- Fully paid ordinary shares are safest for most holders, as all payments are made up front and there’s no future liability.
- Choose share types that match your fundraising needs and your investors’ expectations – but always ensure you comply with legal requirements.
- Always seek legal advice when structuring share issues, drafting terms, or admitting new investors into your company.
If you’d like a consultation about choosing between ordinary and preference shares, or for help with your Australian business’s legal setup, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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