Alphabet Share Structures

Creating different classes of alphabet shares allows a business to attach different rights and pay different rates of dividends according to shareholders’ individual shareholdings. It is an efficient, flexible and often tax-efficient method of structuring your business.

What are alphabet shares?

Alphabet shares is the term used to describe different classes of ordinary shares within a company, typically denoted by letters – A shares, B shares, C shares etc.

Why create different classes of alphabet ordinary shares?

Alphabet shares can have different rights attached to them pursuant to the company’s Articles of Association. Typical uses of alphabet shares include:

  • To pay dividends at different rates to individual shareholders

    • Dividends can be used as a tax-efficient way of paying directors and shareholders, rather than paying them a salary. So, alphabet shares can be used to pay different rates of dividends to individual shareholders. For example, shareholder A may hold all the company’s A shares and Shareholder B may hold all of the company’s B shares.
    • The Articles of Association MUST be amended to allow the company members to differentiate between classes of shares and the rates of dividends payable. This is because the Model Articles – which are the default Articles of Association that apply if a company does not implement its own Articles – require that dividends are paid in
      proportion to number of shares held.
  • To issue different classes of shares in family companies

    • It is common for family companies to distribute shares between family members, allowing them to receive dividends and to split income and improve tax-efficiency.
    • Alphabet shares allow flexibility over the rates of dividends and the rights attributed to each family member. For example, a company director’s spouse may own shares with no or limited voting rights.
  • To award shares to employees

    • Alphabet shares may be used to safely operate schemes allowing employees to be partly paid in the form of dividends. Such schemes can encourage employee loyalty and engagement in the business while being tax-efficient. The classes of shares awarded to employees will vary depending on the way the scheme is set up, but typically the shares will be non-voting and allow the shares to be taken back by the company should the employee leave the business.
Published
10th November 2021