The Differences Between Ordinary Shares vs Preference Shares

Setting up a company in Singapore as an entrepreneur requires you to know many things. One of the things that are worthwhile to learn is the nature of shares. Ideally, this time, we will discuss the difference between ordinary shares vs preference shares. 

A company that wishes to incorporate in Singapore needs to have a minimum of one share, $1 paid-up capital, one resident director, one shareholder, and a local address. 

Shares, by definition, are a bundle of rights that are given to the shareholders who are investing in the company. The shareholders are obligated to participate according to the terms of the company as long as the business is concerned. 

Shares will represent the ownership of the company. The founders, when first creating the company, must decide who will become the shareholders of the company. As the owners become the first shareholders, it is important to make sure that the other parties also get their part of the shares. These shares provide rights and responsibilities to the shareholders. 

Before choosing between ordinary shares vs preference shares, there are certain things that business owners need to understand. Here are key points that need to be considered. Here are they:

• Minimum share capital of S $1.
• Minimum of 1 shareholder and a maximum of 50 shareholders for a private limited company.
• Shares can be distributed in any major currency in the world.
• The freedom to create different kinds of share classes is in the hands of the company.
• The company is also free to hand out shares with the approval of shareholders.
• Shares can be transferred between shareholders.
• Unless there are certain rules, transferring shares between shareholders is not an issue.

Types of shares in Singapore

There are other kinds of shares that you can focus on, besides focusing on ordinary shares vs preference shares. Here is the list of the most common types of shares. 

1. Ordinary Shares

All companies must issue one ordinary share to be able to incorporate. Ordinary shares offer the right to vote. This right of vote is one vote per share that happens at the general meetings. 

2. Non-Voting Shares

These types of shares do not give shareholders of the company the right to vote at the general meetings. 

3. Preference shares

Preference shares give special rights over ordinary shareholders in terms of dividend payments. That might happen if a company is to distribute dividends. The preference shareholders might get the dividends before the ordinary shareholders. Preference shares are non-voting shares that may give the holders a right to claim assets of the company over other shareholders. 

4. Alphabet shares

Since companies can form different kinds of shares, such as Class 1 to Class 3, these different shares also hold different rights and privileges for the shareholders. 

5. Management shares

These shares are given to the founders of the company. It also gives extra voting rights to the holders.

Ordinary Shares VS Preference Shares

After knowing the most common types of shares there are in Singapore, it is time for business owners to decide whether to choose ordinary shares or preferred shares for the shareholders of the company. It might help you to choose if we dive into it right away. 

Ordinary Shares Main Idea

• The main type of shares in private limited companies. 
• All shareholders will have the same rights.
• The shareholders of these kinds of shares can claim the right to attend general meetings.
• Also has the right to vote at the general meetings.
• To vote on important issues regarding the company, such as choosing directors.
• The vote is usually one per share. 
• Shareholders can claim the dividend when the company is making a profit.
• Shareholders can claim assets when the company is wound up and after the debts are cleared. 
• Shareholders of ordinary shares do not have a disadvantage in the priority of dividend distribution. 

Preference Shares Main Idea

• Preference shares are usually given to shareholders that make them have preferential rights over ordinary shareholders. 
• The benefits might vary between companies and are set out in the company’s constitution according to the Singapore Companies Act. 
• Their preferential rights might include their right to company dividends.
• Priority claims to the assets of the company upon liquidation.
• The company can redeem the preference shares at a fixed price.
• Shareholders can convert their preference shares into other instruments issued by the company. 
• Preference shareholders might not have any right to vote during general meetings.

Which Shares Should a Company Choose: Ordinary Shares vs Preference Shares?

Ordinary and preferred shares have their own unique characteristics. A founder of a business needs to understand the appeal of their investors to choose a share for the company. 

Preference shares give priority to receiving dividends to the shareholders, which might be suitable for investors who are more focused on profit matters. Ordinary shares, on the other hand, may appeal to investors who want a say in important company decisions, even though holders do not receive preferential treatment like preference shareholders.

Therefore, in choosing the right shares between ordinary shares and preference shares for the investors, the owner should include the preference of the investors in the company. 

After Deciding Shares

After deciding the share type, ordinary shares vs preference shares, for the shareholders, there is something you need to get within 6 months of the incorporation date according to ACRA, which is the corporate secretary. The role of this secretary is essential. They are bound to update and maintain the statutory books, prepare meetings, do return filing, and many more. 

Using an incorporation services provider company to provide a corporate secretary might be a good idea. Secretaries from the incorporation services provider such as Biz Atom are usually trusted and also experienced. Furthermore, the appointed secretary will keep the company document to be safely guarded. 

Conclusion

Choosing the right shares for the company might be a confusing one. Especially for young entrepreneurs that started their own companies in Singapore. Between ordinary shares vs preference shares, if you should choose, you might want to get the one that suits the company, owner, and the investors the best. If you are interested in incorporating a company in Singapore but need the right guidance, contact us for more information.

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