The private limited companies can avail of multiple kinds of shares. However, most people merely know about common equity shares when it comes to the ownership of private ltd companies. Here, you’ll understand various styles of shares or securities for private limited companies in detail. So, without any further delay, let’s get started.
Primary Types Of Shares In A Private Limited Company
There are significantly two types of shares:
- Equity shares
- Preference shares
1. Equity Shares
Equity shares are one of the most commonly known shares in the corporate world. Now, let’s understand the legal definition of equity shares.
Definition(According to Companies Act of 2013): Equity shares are entirely different from preference shares, and total equity is considered equally. For instance, if you purchase a set of shares from the company, you get several rights incorporated in the company.
In addition, these shares don’t include any preferential factors for capital or dividend repayment. They are also often considered as much riskier than the preferential shares. There is also another category of equity shares known as “Equity Shares with Differential Voting Rights.”
In general, these are given to the company’s CEOs or founders, providing them immense power to deal with the daily affairs of the business. These types of shares offer greater rights to the investors. Facebook and Google are the two biggest and world-renowned companies that issued equity shares with differential voting rights.
If you’d like to get a similar type of shares, you should produce evidence that you can continuously distribute dividend profits for a minimum of 3 years.
2. Preference Shares:
As its name suggests, these shares are preferential where the investors get repaid in case the companies shut down due to certain obligations. Preference shareholders receive payment from the company after the settlement of all the debts. That’s why these are considered less risky.
In the case of a company’s liquidation, the equity shareholders receive repayment only after paying preferential shareholders. Another significance of preferential shares is that they produce minimal profits, whereas equity shares don’t guarantee profits. Unlike equity shares, preference shares don’t give voting or other rights inherent in the company affairs.
There are three types of preference shares that you should consider as follows:
- Cumulative and Non-Cumulative
The cumulative shares ensure repayment of undistributed dividends when the company receives profits. In comparison, the non-cumulative preference shares aren’t eligible to demand the repayments if they didn’t receive any dividends due to the company losses or minimal profits.
- Redeemable and Non-Redeemable
The company Redeemable shares(aka preferred stocks) compensate the stakes after a specific duration where the stakes have come to an end. In contrast, the non-redeemable preference shares pay the shareholders only in case of liquidation of the company. However, according to the COMPanies Act of 2013, no one should issue non-redeemable preference shares.
- Participating and Nonparticipating
The participating shares gain fixed dividend rates with a certain percentage of share in the company’s profits. In comparison, the nonparticipating shares don’t ensure additional income as participating shares. They merely get a fixed dividend from their earlier agreements.