How making use of alphabet shares could help you manage your company

Even if you’re the most proactive of business owners, running a limited company can come with a plethora of challenges that can be difficult to overcome.

Perhaps one of the trickiest aspects of this is structuring the ownership of your business and distributing the profits. Thankfully, one of the more practical tools in your arsenal is “alphabet shares”.

Put simply, this is when you allocate shares to different classes within your company, typically labelled “A, B, and C” – hence the name.

This allows you to assign varied rights and restrictions to each class, giving you more control over voting powers, dividends, and the transfer of shares.

While it might not be a direct correlation, Yale Insights reveals that, on average, the 244 companies in the Russell 3000 index with dual-class or multi-class share structures outperformed those with single-class shares across a 5- and 10-year span.

Your motivations for using alphabet shares might not revolve around company performance like those in a major global index, but rather managing your business more effectively.

So, continue reading to discover how alphabet shares work, how they may be able to help you manage your company, and why advice is essential.

Alphabet shares allow you to distribute control over your company as you wish

As mentioned, alphabet shares allow you to issue different company share classes. Instead of having all shareholders treated equally, you can tailor the structures to fit the needs of your business.

For instance, you could vary the dividend rights for shares, so that some shareholders receive a higher portion of the profits than others.

Similarly, you could create shares that have different voting rights. Indeed, “A” shares might have full voting powers, while “B” shares have limited or no voting rights.

Additionally, if you ever sell your company, you might want to structure the share classes so that certain holders receive a higher portion of the proceedings.

Alphabet shares can also include restrictions on selling or transferring shares, ensuring the control remains with key people. This could be especially handy for preventing takeovers.

As an example, you might hold A shares with complete control and voting rights. You can then allocate B shares to your spouse or family members, allowing them to receive dividends without giving them a say in how the company is run.

This could help you maintain flexibility while protecting your business interests.

3 key benefits of using alphabet shares

There are several ways alphabet shares could help you when it comes to managing your business. Read on to discover three practical benefits.

1. They can give you more control over dividend payments

Dividends are a highly tax-efficient way to extract wealth from your company.

As of the 2024/25 tax year, the tax-free Dividend Allowance is just £500, with any dividends taken above this typically taxed at:

• 75% for basic-rate taxpayers
• 75% for higher-rate taxpayers
• 35% for additional-rate taxpayers.

These tax rates are lower than the equivalent for Income Tax, making this a more tax-efficient way to withdraw funds from your company than paying yourself a salary.

Moreover, unlike your salary, dividends are usually not subject to National Insurance contributions (NICs), presenting further potential savings.

However, if you don’t use alphabet shares and everyone has the same class of shares, you would need to distribute dividends equally, even to people who aren’t necessarily involved in the business. This could include your partner, children, or your business partner’s spouse.

This is where the added control of alphabet shares is often practical. You could receive the full value of dividend payments from your A shares without being obligated to pay the same to others with B shares.

2. They could give you full control over business decisions

Alphabet shares could allow you to retain more control over your company, all while continuing to share the profits with others.

This matters because if you give shares to a family member or a business partner’s spouse or partner, you could do so without giving them decision-making powers.

By separating voting rights from dividend rights, you might be able to ensure that only key people have a say in decisions that might affect the day-to-day operations of your company.

This could involve family members, as described above, but it could involve other people within your business. For example, if you have senior staff members you want to give dividend rights, but don’t want them to have a say in how the company is run, you could allocate them B shares instead.

This might allow your employees to benefit financially from the company’s success, but you remain in complete control of strategic decisions.

3. You could protect your business if something goes wrong

As is the case with most things in life, it’s vital to plan for the unexpected as a business owner. Some of the challenges you might face include:

• Shareholder disputes
• Divorce or family disagreements
• A business partner exiting the company, retiring, or even becoming terminally ill or passing away.

Even though there are several methods of protection available – namely shareholder protection or key person insurance – alphabet shares might also help.

This is because they ensure that certain share classes can’t be sold or inherited externally, preventing other parties from gaining ownership over your company.

Alphabet shares could also prevent an estranged former spouse from influencing the business simply because they were once a shareholder.

Even if your company has two directors who co-own the business and one retires, alphabet shares could ensure that their holdings don’t automatically transfer to an outside party.

Instead, the company could repurchase them or transfer them to the remaining directors.

It’s worth seeking professional advice from a financial planner

While you might assume that you only need a solicitor or accountant to set up alphabet shares, you may overlook the unique perspective a financial planner can offer.

They can help you assess tax efficiency and ensure that your share structure is optimised to minimise Dividend Tax.

They could also help you look at the long term and consider how shareholding structures might affect your retirement or estate planning efforts.

By working alongside your accountant and solicitor, a financial planner may be able to help you ensure that your share structure serves both your business needs and your long-term aspirations.

So, if you’re considering implementing alphabet shares, it’s worth getting in touch with us.

Email info@douglaswhiteltd.com or call 0151 345 6828 to find out how we could help.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

All statements concerning the tax treatment and benefits are based upon our understanding of current tax law and HMRC practices both of which are subject to change in the future. Levels and bases of reliefs from taxation are also subject to change, and are dependent on your individual circumstances

The Financial Conduct Authority does not regulate tax planning.

Sources

Yale Insights article dated 10.01.25, using information from a study published in the Harvard Law School Forum on Corporate Governance.