Share Allocation for your Newly Incorporated Company

Many start-up owners are often unaware of the implications of their share allotment and sometimes even unclear about how shares work. This article will spell out all the key information you would need to effectively allocate your shares with minimal charges incurred subsequently.

What Is Company Share Allocation?

The Singapore Academy of Law defines a share as “interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders between themselves in accordance with section 39(1) of the Act.”

Thus when we’re talking about share allocation, it refers to the distribution of ownership shares in a company among its shareholders. Shares represent ownership interest and give shareholder rights to profits, voting, and decision-making in the company.

What Are the Different Types of Shares?

Usually, startups will tend to go for either ordinary or preference shares, as these are the simpler classifications of shares.

1. Ordinary Shares

Primarily, most start-ups go with ordinary shares. The characteristics of ordinary shares are as follows

• 1 vote per share
• Equal participation in dividend payouts
• Share in surplus capital in case of winding up

2. Preference Shares

Preference shares, as the name states, have preferential rights over ordinary shares for dividends and return of capital on winding up. The characteristics to note for preference shares are as follows

• Non-voting
• Redeemable

3. Management shares

Management shares have extra voting rights. Usually, they are assigned to key decision-makers of the company to ensure they have sufficient control over the company.

All of this is considered when you are incorporating a company in Singapore.

What are Total Shares, Total Issued Shares, Treasury Shares, and Paid-up Capital?

• Total shares refer to the total number of shares that can be issued by the Company, including treasury shares.
• Total issued shares are the number of shares that have been allocated to shareholders. This does not include treasury shares.
• Treasury shares are shares held by the company. As per the Companies Act, treasury shares cannot exceed more than 10% of the total number of shares of the company. For example, if the company has 10,000 shares, only 1,000 can be held as treasury shares.
• Paid-up capital is the amount paid for these shares.

Typical example of how a simple company will do their shareholding structure with 2 equal shareholders (you are free to decide on the absolute numbers)

Total shares: 100 ordinary shares

Paid-up capital: $100

How to split:

• Shareholder A - 50 shares, $50 paid-up capital
• Shareholder B - 50 shares, $50 paid-up capital.

Share Capital Requirements

In Singapore, the share capital requirements have been carefully designed to ensure that all companies can comply effectively. Here are some of the key legal obligations a company must adhere to.

Minimum Share Capital

Singapore companies must have a minimum paid-up capital of $S1, with no maximum capital limit imposed.

Shareholders

A private company must have at least one and no more than 50 shareholders. But, public companies can have more shareholders.

Share Classes

Shares can be classified into different classes, and each class has varying rights –such as voting rights and dividend rights. This will allow for flexibility in managing different types of investments.

How to Decide on Share Allocation?

Share allocation involves determining who receives shares and how many they will receive. This is typically based on several factors, including the individual position in the company, the role of investors, and the availability of employee stock options (ESOP).

Founders of the company often receive a significant portion of the shares –as this reflects their role in establishing the company and their risk exposure. It is common for founders to have shared distribution based on the contribution, role, and expected involvement. Additionally, investors can also gain share allocation from the company, especially if the company is seeking external investment. The shares will be allocated to investors in exchange for capital.

On the other hand, some companies in Singapore also provide employee stock options as a way to improve their high-quality employee performance and retention. Thus, they might need to allocate some part of the shares to employees through ESOP.

Key Takeaway

Effective share allocation is foundational to the success of a newly incorporated company in Singapore. By understanding the legal framework on how to carefully decide on share allocation, you can help set the company on a path to growth and stability!

Frequently Asked Questions

Does the amount I have declared as paid-up capital need to be deposited into my bank account?

Yes, on the grounds of good accounting principles. However, that amount does not need to remain in the bank for the long term as it can be reinvested for relevant corporate needs.

Can I alter my share capital whenever required?

Yes, however, this is subject to your own internal shareholder approval. Relevant changes can be filed with a corporate service provider’s assistance. However, the lead time for some of these changes like Share Capital Reduction can take up to 8 weeks.