Preference Shares for a UK Company
A quick read from 3E Accounting to better grasp the concept of preference shares for a UK company.
Sometimes known as preferred stock, preference shares for a UK company offering a more elevated position for shareholders. They are technically considered equities and seen as a good way to raise capital without over-issuing shares. Preference shares are usually a less risky option to take. They offer a safer long-term, stable yield return on investment and is a great way to diversify your portfolio.
Ownership of a company or enterprise is usually in terms of how much share a person has. In their most basic definition, shares are units of ownership and the person who owns it is known as a shareholder. There are different classes of shares that a company can issue, and each has its pros and cons. Shares can be ordinary, redeemable, non-voting, etc. Having different classes of shares is an excellent way to attract more investment and push up the dividends.
Generally, a company is incorporated with ordinary shares that carry the usual voting rights. As opposed to ordinary shares, preference shares confer additional entitlements to a shareholder. They are more commonly issued by larger companies with more robust investment portfolios. Both ordinary shares and preference shares provide their shareholders with dividends and a stake in the company. However, preference shares’ predominant feature is to ensure a shareholder has preferred status, i.e., always at the head of the queue.
Hence, preference shares get paid dividends before ordinary shares and other types of shares. The dividends are usually paid bi-annually and are not dependent on the company’s performance but are pre-determined. This provides stability and certainty to shareholders, making it a less risky investment.
Preference shares also have a priority claim over assets and capital if the company winds-up. This means preference shares come in after creditors but before all other shareholders.
On the negative side, voting rights are not automatically attached and maybe quite limited where given. Further, dividends are fixed and will not reflect any extra profits the company may make. There is also no condition of guaranteed payment, especially if there are no profits or other shareholders vote to restrict pay-outs. You will also have to pay taxes on dividends from preference shares.
Preference shares have a few sub-varieties and can be either cumulative or non-cumulative. Cumulative preference shares are worth more as they allow missed dividend payments to accrue and be claimed later. Another sub-variety are redeemable preference shares. This provides the company with an option to buy back the shares from a shareholder. Preference shares can also be of the convertible type, whereby they can be converted into ordinary shares.
To learn more about preference shares for a UK company, Contact 3E Accounting. Our team of global professionals offer impeccable solutions for all your business needs. We will walk you through all the necessary processes and offer customisable options that work best for you and your business. Along with our affiliates and partners, 3E Accounting provides international experience with regional expertise. Get in touch with 3E Accounting today for innovative business solutions.