Understanding How Shares Work in Australian Companies

Shares form the backbone of most Australian companies, underpinning the concepts of ownership, corporate structure, and wealth creation. If you’re starting a business, thinking about investing, or simply want to understand “how does shares work?” in the Australian context, you’re in the right place.

Owning shares can be exciting - a way to own a piece of a promising new company or participate in the growth of a larger business. But “how shares work” is often misunderstood, especially when it comes to your rights, responsibilities, and the process of earning money as a stockholder. Getting these details right from the start is crucial for both business owners and investors alike.

In this guide, we’ll break down what shares are, how they fit into company structures in Australia, how stockholders can earn money from their investment, and what you need to have in place legally to protect your interests - whether you’re founding a company or investing. Let’s work through the key points together, so you can understand shares and make confident decisions.

What Are Shares? Plain English Explanation

Let’s start with core definitions. In the Australian business world, a “share” represents a unit of ownership in a company. When you own shares in a company, you are a “shareholder” - someone with a financial stake in the business. For example, if a company has 100 shares issued and you own 10, you legally own 10% of that company.

This fraction of ownership gives shareholders legal rights. As a shareholder, you may get a share of profits (called “dividends”), a right to vote on company matters, and the ability to sell (or otherwise transfer) your ownership later.

Types Of Companies And Shares In Australia

• Proprietary Limited (Pty Ltd) Companies: The most common entity for small and medium Australian businesses. Shares are privately held and not traded on a stock exchange.
• Public Companies (Ltd): Often listed on the ASX, these can have unlimited public shareholders and must meet detailed reporting rules.

Most small businesses start as a proprietary limited company (Pty Ltd). This is where understanding shares becomes most important for founders, staff, and early investors.

How Does Shares Work In an Australian Company?

At a practical level, shares are issued by a company to founders, investors, or sometimes employees (as incentive). Each share gives you a proportional say over the company and a stake in future profits. Here’s how the process usually unfolds:

1. Company Formation: The company is registered and issues a certain number of shares, often split between the founders.
2. Ownership and Capital: Shareholders buy shares in exchange for money or contributions (known as capital).
3. Rights and Responsibilities: Shareholders earn voting rights, a say at annual meetings, and the right to receive dividends if declared. They are also entitled to a portion of the company’s assets if it’s wound up (after debts are paid).

In a nutshell, shares work by distributing both the potential rewards and the risks of running the business among the owners. The more shares you own, the bigger your claim on profits - and your voting power in key company decisions.

If you want to dive deeper into the steps of setting up a business and allocating shares, check out our guide on how to start a business and how to allocate shares in a startup.

How Do Shareholders Earn Money On Their Financial Investment?

One of the main reasons entrepreneurs and investors want to own shares is the possibility of earning financial returns. In Australia, there are two common ways shareholders can make money from their shares:

1. Dividends: These are periodic payments made out of company profits to shareholders. They aren’t guaranteed - directors decide if and when to pay dividends based on the company’s performance and goals.
2. Capital Gains: If the company grows in value, your shares may become worth more. You can sell your shares (to new investors or on-market, if the company is listed) for more than you paid, and the difference is your profit - a capital gain.

For example, if you buy 1,000 shares in a startup at $1 each, and the company later grows so those shares are valued at $3 each, you’ve made a paper gain. If you sell, you realise this gain.

Keep in mind, dividends are relatively uncommon in brand-new companies, as profits are often reinvested into growth. But many established businesses regularly pay dividends to reward their shareholders.

If you’re thinking about what happens when sharing ownership, you might want to learn about shareholder disputes and why having clear agreements is crucial.

What Rights Do Shareholders Have?

Shareholders have specific legal rights in Australia, which are designed to protect their interests and make sure companies are run responsibly. Here are the key rights:

• Voting Rights: Most shares give you the right to vote at shareholder meetings, including electing directors and voting on major changes.
• Dividend Rights: If the company declares dividends, you get your fair share - proportional to your holdings.
• Information Rights: You have the right to receive certain company documentation, such as annual reports, financial statements, and notice of meetings.
• Transfer Rights: You can sell or transfer your shares, subject to rules (often in a shareholders agreement or the company constitution).
• Rights on Winding Up: If the business closes and assets are sold, shareholders receive any remaining funds (after all debts are paid), again relative to their shareholding.

These rights are usually spelled out in a combination of the company constitution, the shareholders agreement, and national laws like the Corporations Act 2001.

What Is The Difference Between Ordinary And Preference Shares?

Not all shares are created equal. When considering “how does shares work”, it’s worth understanding the two main types most often used in Australia:

• Ordinary Shares: Most common. Usually one vote per share and equal rights to dividends and capital.
• Preference Shares: Sometimes offered to early investors or special categories. Often get priority over ordinary shares when it comes to dividends or repayment if the company is wound up, but may not have voting rights.

Your rights as a shareholder will differ depending on the class of shares you own, so always make sure you’re clear on this before investing or issuing equity.

If you’re unsure about share classes or planning to offer equity to early team members or investors, our legal team can help you work out the best structure.

How Are Shares Issued, Sold And Transferred?

Understanding how shares work isn’t just about ownership - it’s also about how you get those shares, and what happens if you sell them. Here’s what’s involved:

• Issuing Shares: When starting or expanding a company, new shares can be ‘issued’ in exchange for capital, sweat equity, or other contributions. The directors must follow rules about who can be issued shares, and the decision is usually recorded in board resolutions.
• Selling Shares: In private companies (Pty Ltd), shares aren’t sold on the open market, but can be transferred (subject to company rules and sometimes pre-emptive rights for other shareholders to buy first).
• Transferring Shares: Selling or gifting your shares to someone else must be documented. Normally, a share transfer form is needed, and must be registered on the company’s share register.

Different rules apply if you’re running a listed company or a public company, but most startups and small businesses use proprietary companies and private share sales.

Is There A Legal Limit On The Number Of Shares?

No, there’s no strict legal minimum or maximum for the number of shares a private company in Australia can issue. You could issue one, one hundred, or thousands of shares - it’s up to the company’s founders and directors. The important thing is that the total number of shares is divided up according to ownership agreements, and this should be reflected in the share register.

(Some companies start with 100 shares, others with 1,000,000 - the number itself matters less than the percentages each person owns.)

You can learn more about this in our detailed guide on how many shares a company can have.

What Legal Documents And Compliance Are Needed For Shares?

Getting your company’s shares right involves more than just splitting the pie. To protect everyone’s rights and avoid future disputes, clear documentation is vital. Here are the most important documents for Australian companies using a share model:

• Company Constitution: This sets the rules for running the company, including how shares can be issued, transferred, or cancelled. Learn more about company constitutions here.
• Shareholder Agreement: Highly recommended if you have more than one shareholder. This deals with how major decisions are made, rules for selling or transferring shares, and resolving disagreements. See everything you need to know about shareholders agreements.
• Share Certificates: Given to each shareholder as proof of ownership.
• Share Register: This is a central record of all shareholdings, transfers, and details kept by the company.
• ASIC Notifications: Australian companies must notify ASIC (the corporate regulator) of new share issues and changes to shareholdings.
• Employment Agreements / ESOP Agreements: Shares (or options) are increasingly used to reward staff in startups. Agreements should clearly set out vesting schedules and what happens if someone leaves the company.

Every startup or business with more than one owner should invest in well-drafted legal documents around shares - uncertainty here can lead to expensive and stressful disputes later.

Do I Need Legal Advice Or Can I DIY?

It’s absolutely possible to set up a company and allocate shares yourself, but there are legal risks with a “DIY” approach - especially if you’re bringing in co-founders, investors, or planning for future business sales. Ambiguity around how shares work, who owns what, and what happens if someone leaves are common sources of costly arguments.

We always recommend getting advice on your company constitution, having a plain-English shareholders agreement, and checking your plan with an experienced legal team.

Sprintlaw specialises in company set up and tailored shareholder agreements - we’re always happy to support new founders or investors who want to do things right from day one.

Other Key Considerations With Shares

• Raising Capital: If you’re planning to raise funds by selling shares, get familiar with requirements around capital raising and disclosure. There are strict rules on how and when shares can be offered to new investors, particularly to the public.
• Tax and Employee Shares: Offering shares to staff (employee share schemes) can have tax and regulatory implications - make sure you get tailored advice to structure this properly.
• Succession and Buy-Sell Planning: Think ahead about what happens if a shareholder wants to leave, or passes away. A robust agreement and clear process smooth these events.
• Confidentiality: If you’re sharing sensitive business information with potential investors or partners, use a Non-Disclosure Agreement (NDA) to protect your ideas.

Key Takeaways

• Shares represent legal ownership in an Australian company, entitling holders to voting rights, possible dividends, and a share of the business’s growth.
• Shareholders can make money through dividends (profit distributions) and capital growth when shares increase in value.
• Getting the legal structure and share documentation right (company constitution, shareholders agreement, ASIC filings) is essential for long-term success and avoiding disputes.
• Different share classes (ordinary, preference) offer different rights - make sure you know what you’re buying or issuing.
• Raising capital, bringing on co-founders, or offering equity to employees all involve important legal and tax considerations - custom legal documents will protect your business and your interests.
• Professional legal advice at the outset is the best way to ensure fairness, compliance, and clarity for all shareholders.

If you would like a consultation on setting up your company and understanding how shares work in Australia, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.