How a Private Limited Company Raises Money by Selling Shares

The Enterprise Investment Scheme (Eis) allows companies to raise funding without having to go public. This video explains how you can use it to raise money for your business.

How the scheme works

The Enterprise Investment Scheme (EIS) is one of the most popular investment schemes in the UK. In fact, it is open to any UK based company, regardless of size, sector or location. This means that investors can benefit from tax reliefs without having to invest in companies outside the UK.

Companies that invest in themselves through the scheme can receive an unlimited number tax reliefs over the lifetime of the scheme. There are three different options for accessing the tax reliefs: a fixed annual payment; the option to sell back shares at a later date; or the ability to take out loans against the shares.

Approved EIS funds

On April 6, 2020, the rules for EIS-approved funds will change to take into account:

changes that will put approved funds on investments that require a lot of knowledge

fund managers have more freedom over when to invest their money.

What money raised can be used for

The IPO market is heating up again, and companies are looking to raise funds from investors. But how do you know what those funds will be used for? Here’s a list of some common uses for the money raised.

(1) Manufacturing, wholesaling, retail, import/export, mining, quarrying etc.

Money raised by an initial public offer (IPO) will go towards manufacturing, wholesaling, retailing, importing, exporting, metal mining, quarries, agriculture, forestry, fisheries, hunting, livestock farming etc.

(2) Qualified trades

Money raised by an IPO will be used for manufacturing, wholesaling, selling, buying, trading, importing, exporting, manufacturing, wholesale, retailing, mining, quarrying agriculture, forestry, fishing etc.

(3) Research & Development

Companies look into research and development to find out how to make products better, cheaper and faster. They might use the money raised to fund R&D projects.

(4) Risk of Loss

Risk of loss means that the capital invested may lose value and investors may suffer financial losses. Companies usually invest in shares because they want to earn profits. If there is a risk of losing money, it won’t be worth investing.

Businesses that can use the plan

The government has launched a new scheme aimed at encouraging small businesses to invest in digital technology. Businesses that meet certain criteria can apply for the scheme, which will allow them to pay less corporation tax.

Under the Digital Technology Investment Scheme (DTIS), eligible businesses will receive a 25% discount on their corporation tax bill. They must also provide evidence that they are investing in digital technologies such as cloud computing, artificial intelligence, data analytics, robotics, virtual reality, augmented reality and blockchain.

These investments must be carried out over three years. In addition, the companies must have fewer than 250 employees, a turnover of £20 million per annum and a balance sheet value of no more than £50m.

Businesses that do not qualify for DTIS will still pay corporation tax at 28%. However, there is some good news for those who do qualify: they will also benefit from a 50% reduction in the amount of VAT they pay.

The government says that the scheme will help boost growth and support job creation.

Limits on money raised

Your company can’t get more than £5 million from any of the following sources in a 12-month period:

EIS

Venture Capital Trusts (VCT)

Seed Enterprise Investment Scheme (SEIS)

social investment tax relief (SITR)

Check with the person who gave you state aid that was approved under the risk finance guidelines for advice.

Your company will never be able to get more than £12 million from these sources. This includes any money you got from a subsidiary, a business that used to be a subsidiary, or a business you bought.

Rules about how old your business can be

You can get money from EIS if it’s been less than 7 years since your first sale to the public. If you have any subsidiaries or businesses that you bought, the date of your first commercial sale is the earliest of all of them.

If you got investment through EIS, SEIS, SITR, VCT, or state aid during this time period and it was approved under the risk finance guidelines, you can use EIS to raise money for the same activity as long as you planned to do so in your original business plan.

If you didn’t get investment in the first 7 years or want to raise money for something other than what it was originally used for, you’ll have to prove that the money:

is needed to get into a completely new market for a product or a new market in a different place.

what you want is at least 50% of your company’s average annual sales over the past five years.

Qualifying subsidiary companies

If your company owns or runs other businesses, those businesses must be “qualifying subsidiaries.” What this means is:

Your company has to own more than half of the shares in the subsidiary.

This subsidiary can only be controlled by your company or one of its other qualifying subsidiaries.

no agreements can be made that would give someone else control of this subsidiary.

Your company must own at least 90% of the subsidiary if any of the following are true:

The qualifying subsidiary will carry out the business activity that you will spend the money on.

subsidiary’s main business is taking care of property or land.

The subsidiary can be set up to finish a project or a series of projects before shutting down, as long as it helps your company grow and develop.

Risk to capital condition

A risk to capital condition exists when you invest in a company where it is possible that the company could fail to repay the loan or interest payments due on the loan. This type of situation occurs when the company has insufficient resources to meet its obligations. If the company fails to make those payments, the lender will lose part of the value of the loan. In addition, the borrower might go bankrupt and the lender loses the entire amount lent.

In general, companies that are considered risky investments include start-ups, small businesses, real estate ventures, and some types of technology companies.

Companies that are considered safe investments include large corporations, publicly traded companies, and government agencies. These companies generally have sufficient revenue to cover both debt repayment and interest payments.

The following table lists examples of each category.

Category Examples

Start-up Companies Small businesses Real Estate Venture Technology Company

Insurance Insurance

Equity Equity

When you issue shares

Shares must be paid up in full in cash when issued. You must have a way to pay for the shares in advance. If you are offering shares to raise money, you cannot make any arrangement to protect investors against risks. This includes guarantees, warranties, indemnities, undertakings or similar commitments.

Before raising your money

If you meet the requirements for EIS, your investors will be able to get tax breaks.

Before you issue the shares, you can ask HMRC if they think they will qualify. This is called “advance assurance.”

How to apply

When you issue shares, you are required to complete an EIS1 Form and submit it to HM Revenue & Customs. This includes details about your company’s financial position and operations.

You must ensure that you meet the criteria set out in section 5(2)(a), (b) and (c) of the Enterprise Investment Scheme Regulations 2006 (EIS Regs). If you do not meet these requirements, you cannot claim tax relief under the EIS.

If you raise funds via crowdfunding, you will need to obtain advance assurance from HM Revenue & Customs (HMRC) that you are compliant with the law.

This is because HMRC considers crowdfunding activity to be ‘capital raising’ rather than ‘business investment’. As such, you will need to comply with additional rules.

You will need to keep records of all transactions and payments made by your company. You must retain these records for six years after the date on which they were made. You will also need to produce evidence that you qualify as a ‘knowledge intensive company’, which means that your company employs people whose skills require specialist training or experience.

The information you supply to HMRC will be used to determine whether you are eligible for tax relief under the EIR. HMRC will assess your case and notify you of the outcome within three months.

Once you receive notification from HMRC, you have two years to lodge an appeal against the decision.

Send your application

The UK government has launched a campaign encouraging people to apply for their free Universal Credit benefit online. This follows reports that some claimants are being sent letters asking them to fill out paper applications.

The government says that anyone who applies for Universal Credit online will receive their payment within five days. Those applying via post will receive their money within 14 working days.

A spokesperson told HuffPost UK: “We want everyone to access benefits quickly and easily and we know many people struggle to do this because they don’t understand what they need to do.”

They added: “Our new online system makes it easier than ever to claim Universal Credit. We’re urging anyone claiming Universal Credit to use our new online system where possible.

Frequently Asked Questions

How many different kinds of shares are there?

There are four kinds of shares: preference shares, ordinary shares, redeemable shares, and cumulative preference shares.

How do stocks get sold?

When one person sells one or more shares to another person, this is called a stock transfer. The buyer gives the owner the amount of money that each share is worth, and the owner fills out and signs a stock transfer form. In exchange for the price they agreed on, they give the new owner this and any other share certificates.