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What is a Company's Share Capital and Why Does It Matter?

By Bernardo Barbosa

Published on 22 January 2024

8mins read

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If you're trying to start a business, share capital is a key concept to keep in mind. It's crucial not only to structure a business correctly but also to raise funds, know the value of a company's shares, determine capital appreciation, and select the right legal structure.

In this article, we will tackle vital business notions such as common and preferred shares so you can manage existing shareholders better and strive for long-term financial growth. Ready to get started?

What is Share Capital?

A company's share capital is the total value of the shares it has issued to shareholders. It represents the ownership interest in the company and the financial contributions made by such shareholders.

The share capital is an essential component of a company's equity, which is the difference between its assets and liabilities. Some shares may have a nominal or par value, which is a value assigned to each share for accounting purposes. The amount paid for the shares may be more than or equal to this par value.

Share capital is raised by issuing shares to investors in exchange for cash or other forms of consideration. The share capital is recorded on the company's balance sheet under the equity section. It is divided into different classes of shares, such as common or preferred stock:

Common Stock

Common stock represents a type of ownership interest in a company. When an individual or institutional investor purchases common shares, they become a shareholder and acquire certain rights related to the company. Common shares are a form of equity, and their holders are considered residual owners of the company.

Here are some key traits of common stock:

  • Voting rights: Common stock shareholders have the right to vote on important company matters.
  • Dividends: Common stock may pay dividends to shareholders.
  • Residual asset claims: In case of liquidation or bankruptcy, common shareholders have a residual claim on the company's assets.
  • Preemptive rights: In some cases, common shareholders may have preemptive rights, allowing them to purchase additional shares before new shares are offered to the public.

Preferred Stock

Preferred stock gives preferred shareholders additional rights over common shareholders. In opposition to common shares, preferred shares are usually sold at a fixed par value and have limited voting rights. However, they give shareholders preference (hence the name) when receiving dividends and splitting assets after liquidation.

Here are some key traits of preferred shares:

  • Voting rights: They're often minimal, as preferred shareholders tend to be excluded from a company's decision-making process.
  • Dividends: Preferred shareholders have a fixed dividend rate and are entitled to receive dividends before common shareholders. If the company has profits to distribute, preferred shareholders will be paid their dividends first.
  • Residual asset claims: In the event of liquidation or bankruptcy, preferred shareholders are entitled to receive their investment back before common shareholders receive any remaining assets.
  • Regular income: Preferred shares are often considered a more stable investment compared to common shares because of their fixed dividend payments.

Why Does Share Capital Matter?

A company's share capital matters because:

1. The distribution of share capital reflects the ownership structure and control of the company.

2. Share capital is a form of equity financing. When a company issues shares, it can raise capital from investors. Such capital can later be used to fund various business operations.

3. Share capital contributes to a company's overall capital structure.

4. The level of share capital can be an indicator of a company's financial health and stability.

5. Share capital plays a crucial role in determining a company's market capitalization, which is the total value of its outstanding shares in the stock market.

6. Share capital information is disclosed to investors, analysts, and regulatory bodies, providing transparency about a company's ownership structure.

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Types of Share Capital

There are several types of share capital out there. Below, we have collected five of the most important:

1. Authorized Share Capital

Authorized share capital, also known as authorized stock or nominal capital, refers to the maximum number of shares that a company is legally allowed to issue to its shareholders. It is the upper limit specified in the company's articles of association or its corporate charter.

The authorized share capital is a theoretical or nominal value and does not necessarily represent the actual number of shares that have been issued or sold by the company.

2. Issued Share Capital

Issued share capital refers to the portion of a company's authorized share capital that has been actually issued and allotted to shareholders. In other words, it is the total value of shares that the company has distributed or sold to investors.

The issued share capital represents the equity that shareholders have acquired in exchange for their investment in the company.

3. Unissued Share Capital

Unissued share capital refers to the portion of a company's authorized share capital that has not been issued or allocated to shareholders. It represents the number of shares that the company is legally permitted to issue but has not yet been offered for sale or distributed to investors.

In essence, unissued share capital is the remaining capacity for the company to raise additional equity capital.

4. Subscribed Share Capital

Subscribed share capital refers to the portion of the issued share capital that has been subscribed to or taken up by investors. When a company issues shares, it offers them to potential shareholders, and those who express interest and agree to purchase the shares are said to have subscribed to the share capital.

Subscription involves committing to buy a specific number of shares at a predetermined price.

5. Paid-In Capital

Paid-in capital typically refers to the total amount of capital that shareholders have contributed to a company by purchasing shares.

Paid-in capital encompasses both the nominal or par value of the shares and any additional amounts paid by shareholders above the par value.

6. Paid-Up Capital

Paid-up share capital refers to the portion of a company's issued share capital for which shareholders have already made the required payments. In other words, it represents the amount of money that shareholders have contributed to the company in exchange for the shares they hold.

The term "paid-up" indicates that the shareholders have fulfilled their financial obligation to the company in terms of the subscribed shares.

Balance Sheet Share Capital: How Does It Work?

A company's balance sheet provides a snapshot of its financial position at a specific point in time, and share capital is an essential component of the equity section on the balance sheet.

Here's how you can apply share capital to a company's balance sheet:

1. Understand the different classes of share capital, such as common shares and preferred shares, and identify whether the shares have a nominal or par value.

2. Find the authorized capital for your company.

3. List the issued capital under the equity section of the balance sheet.

4. Sum the issued share capital and additional paid-in capital to calculate the total shareholders' equity from share capital.

5. Provide a final total for the shareholders' equity section, combining share capital, retained earnings, and any other components.

Share Capital vs. Equity Capital

While share capital specifically refers to the value of shares issued by a company, equity capital is a broader concept that encompasses various forms of equity financing.

Equity accounts for the portion of a company's financing that is provided by its owners or shareholders, representing the residual interest in the assets of the company after deducting its liabilities.

Share capital is a significant subset of equity capital and represents the ownership interest of shareholders in the form of shares issued by the company.

Summary

The funds raised through share capital can make or break a company, but share capital is about good business management in the end. Some of the concepts listed in this article can be quite hard to navigate, so it's important to have a team of experts behind you.

With Rauva, you can comfortably master shareholders' capital and count on invaluable support for creating a company, raising share capital, and ensuring authorized capital compliance.

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Frequently Asked Questions (FAQ):

What is paid-in capital?

Paid-in capital encompasses all the money received by a company in exchange for shares.

What is paid-up capital?

Paid-up capital stock represents the money shareholders have already paid for the shares of a company.

What is shareholders' capital?

Shareholders' capital is the residual interest in the assets of a company after deducting its liabilities.

How do you calculate shareholders' capital?

The formula to calculate shareholders' capital is very simple. To find a company's shareholders' capital, you just need to calculate the total assets amount after taking away the total liabilities amount.

What are equity securities?

Equity securities are financial instruments that represent ownership interests in a company. On the other hand, a company's equity raised is the total amount of capital it has received from issuing such securities to investors.

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Written by Bernardo Barbosa

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