Everything you need to know about preference shares

Clipboard with text PREFERENCE SHARES.

If you decide to form a limited company in the UK, you’re going to benefit from a wide range of choices about how you want to set that new company up.

There are a few different types of limited company structures you get to choose from. However, the most popular type of UK company is a limited by shares company. This is the perfect fit for most UK businesses that want to leverage the many benefits and protections associated with company formation.

But even if you settle on forming a limited by shares company, you’re then faced with another big choice: what kinds of shares do you want to issue to company members?

Most limited companies go for ‘ordinary shares’, which are fairly straightforward and ideal for companies with a small number of shareholders. Yet if you’re planning on having a larger number of shareholders but still want to protect how much say you’ve got in the way your company is run, it might be worth looking into preference shares.

This guide explains what preference shares are, how they work, and the main types of preference shares.

What are preference shares?

Preference shares have a lot in common with both ordinary shares and fixed-income securities. You’ll also hear them called ‘preferred shares’ or ‘preferred stock’.

When you issue a preference share to an individual or entity, that shareholding party automatically gains priority when it comes to getting paid any dividends the company decides to issue.

More simply put: if your company hands out dividends, all your preference shareholders must get paid before ordinary shareholders see a penny.

Certain preference shares can be linked to fixed dividends, which means those shareholders receive a certain amount in dividends on an annual basis. The tradeoff for letting preference shareholders skip the queue for dividends is that they generally don’t enjoy the same level of voting rights or upside participation in big company decisions.

What are the main types of preference shares?

While preference shares all work the same way in principle, there are several different types of preference shares.

Each share type is designed to do something slightly different. So, to help give you an idea of the core benefits each type brings to the table, let’s quickly walk through how different preference shares work.


Cumulative preference shares require a limited company to pay preference shareholders all dividends owed before common shareholders.

But the important distinction with cumulative preference shares is that companies aren’t just required to pay future dividends. They must also pay any outstanding dividends from previous years before any common shareholders can get paid.

In some cases, limited companies may be required to pay interest to cumulative preference shareholders if there are any dividends in arrears.


Non-cumulative preference shares entitle shareholders to receive any dividends before common shareholders. But unlike cumulative shares, non-cumulative preference shares don’t require a company to pay out previous or forgone dividends.


Participating preference shares entitle shareholders to be paid fixed dividends — no matter how much common shareholders receive. Participating preference shareholders may also receive an extra dividend based on predetermined conditions.

If a company gets liquidated, participating preference shareholders are usually repaid the purchasing price of their shares, as well as a pro-rata share in the remaining proceeds received by common shareholders.


Convertible preference shares entitle shareholders with the option to convert their preference shares into a certain number of common shares after a pre-agreed date.

This normally has to be done at the shareholder’s request. Although a company can include a provision that the shares be converted regardless.

Regarding value, it’s important to note the worth of convertible preference shares will ultimately be based on how well common shares perform.

Want to learn more about UK company shares?

Although this guide has covered preference shares in depth, it’s important to note there’s a lot more to know about UK company shares — including the basics on ordinary shares, redeemable shares, growth shares, and more.

Check out the Linnear COSEC Knowledge Centre to make sure your business stays in the know about how company shares work. You can also get in touch to find out how our company secretarial services can drastically reduce your costs and free up your time to help you focus on running your business.

About the author

Nicholas joined in 2018 to set up the Company Secretarial Department in the group’s company formation divisions. After establishing the department, he was a key stakeholder in the development of Linnear CoSec. Prior to joining the group, Nicholas worked in a variety of client-facing positions at an international provider of corporate services, caring for a diverse portfolio of companies. He is a Chartered Secretary and Governance Professional, and holds a bachelor's degree in Politics as well as a Masters in Corporate Governance.

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