Do founder shares need to be paid for?

Do founder shares need to be paid for?

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Hi

I just want to check that I'm not missing something.  We have a number of directors who have founder shares in the company.  These were issued at the time of starting the company and so far they have not been paid for.  If these remain unpaid does this cause any problems either from a tax point of view in the future (if the company was to be sold) or from a financial reporting point of view in the meantime?

Thanks for any help.

Replies (12)

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By johngroganjga
29th May 2014 21:56

They need to be paid for just as much as any other shares.

It doesn't create any particular issues.

It's not a tax issue at all. Tax doesn't come into it.

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By Steve Kesby
30th May 2014 08:05

Check the company's articles

I believe that standard Table A articles does require all shares to be fully paid, other than subscriber shares.

If that's what the articles say, then the shares can be left unpaid. The shareholders would be required to pay the unpaid amount in the event of an insolvent liquidation. That's what limited liability means.

It has previously been considered in some quarters that leaving an amount unpaid on the shares creates a liability under CTA 2010, s. 455. There is recent case law though that confirms that this isn't the case in respect of any uncalled amounts.

Thanks (2)
Replying to Wanderer:
Stepurhan
By stepurhan
30th May 2014 14:35

Founder=Subscriber?

Steve Kesby wrote:
I believe that standard Table A articles does require all shares to be fully paid, other than subscriber shares.
What if the founder shares are not all subscriber shares?

Say the not uncommon situation of an off-the-shelf company with a single subscriber share. As their last act in turning the company over, the formation company transfers that share, and then issues whatever additional shares are required. Most people would think of all of those as founder shares, as those were the initial shareholdings when the company started from their point of view. However, the additional shares would presumably be required to be fully paid under standard Table A.

May be worth checking the share history.

Thanks (1)
RLI
By lionofludesch
30th May 2014 14:06

Bank Loans

There can be an issue with the bank.

Some years ago, a bank refused to lend £50000 unless the shareholders increased their holdings to £10000 and paid it up.  It wasn't a legal requirement, just that the bank wanted to see that the directors were chipping in too.

Personally, I don't think it looks inviting to a lender if the shareholders haven't even paid for their shares.   Is it a big problem ?  Usually not.

Not sure what you mean by "founder shares" by the way.

Thanks (1)
Replying to Wilson Philips:
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By LucyP123
02nd Jun 2014 15:06

Thanks for the warning with this. I just meant that they were the founders of the company, so it was the first lot of shares to be issued.

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By andyjdicker
30th May 2014 14:13

Well the double entry has to be something. If the Share capital is a nominal figure, like £100 then I would never see a problem with that being shown as an effective cash balance which the company hold (or even incorporating it into a directors loan account, which would be effectively saying the shares were paid (for cash) and then that cash which the company holds was borrowed).

Anything over that I would definitely say should be 'actually' be paid, and shown in the bank account of the company as a transfer of fund into the company.

Thanks (2)
By Steve Kesby
30th May 2014 14:24

Why does there have to be...

... a double entry for uncalled and unpaid shares? No cash has been received and there's no debt to recognise until unpaid amounts are called up on the shares.

I do agree with lionofludesch that having unpaid shares can give you problems raising finance, because who's to say that when the unpaid amounts are called they will actually be paid.

Thanks (1)
Replying to Montrose:
RLI
By lionofludesch
30th May 2014 14:54

Basic

Steve Kesby wrote:

I do agree with lionofludesch that having unpaid shares can give you problems raising finance, because who's to say that when the unpaid amounts are called they will actually be paid.

I think it's a bit more basic than that.  I reckon the lender thinks "if you can't put up your money, why should we ?"

Thanks (1)
By Steve Kesby
30th May 2014 14:48

I agree, of course, stepurhan...

... but do people really still buy off the shelf companies these days?

I've just checked Table A as well, going back to the original 1856 version and there's never been a requirement in standard Table A articles that any shares had to be paid up beyond any calls made. I let another recent question confuse me.

It could be that the articles aren't standard and do have such a requirement though, and that the history of the shares may also be relevant.

Thanks (1)
Replying to penelope pitstop:
Stepurhan
By stepurhan
30th May 2014 15:10

How old is it?

Steve Kesby wrote:
... but do people really still buy off the shelf companies these days?
Not these days I would have thought, but we have no indication how old this particular company is. "so far" could be six months or ten years.
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By James26
05th Jun 2014 11:33

Little bell....

... dinging in my head.  I'm assuming that essentially these are therefore just ordinary shares which are partly paid up. 

I remember considering this as a potential technical issue / risk in a structure at some point.  I think it was an overseas entity where the share capital entirely consisted of partly paid shares.  I'm afraid though that I can't remember exactly what the issue was.  I think it might perhaps have been on an SSE analysis a company had entirely partly paid shares and therefore there was some doubt as to whether this might have broken the SSE group.  This would have been for some reason such as the shareholder not being entitled to dividends but I can't quite remember.

If you are depending on these partly paid shares to claim a certain relief (e.g. entrepreneur's relief) you might want to consider if there is anything like the above that might be a problem.  Since there is/was a common play with Entrepreneur's relief to give people 5% of the votes but not 5% of everything then I doubt this is likely to impact that much.  If the amount not paid is small, for the sake of tidy house keeping, it is probably just as well to get them to be fully paid.

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By RMorrison
05th Jun 2014 11:38

Model Articles - 2006 Companies Act

If the company concerned was incorporated under the 2006 Companies Act with only the Model Articles then all shares (other than the subscriber shares) must be fully paid up - see article 21.

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