If you're setting up a limited company or just exploring the world of business finance, you've likely come across the term "share capital." when filling out a confirmation statement. But what does it really mean, and why is it so important for company formation and operations?
This guide will answer the question of what is share capital in a straightforward, approachable way, answering common questions and providing insight into its legal and business implications.
By the end of this article, you'll have a clear understanding of what is share capital in business and in accountancy, and the role it plays in managing ownership and investments within a company, even thought it`s your first time ever setting up a limited company or partnership.
What Do You Mean by Share Capital?
At its core, share capital refers to the money raised by a company through the issuance of shares. When individuals or entities purchase these shares, they essentially invest in the company, becoming shareholders. To dive deeper into how to become a shareholder, click here
The money contributed by these investors forms the financial foundation of the business, enabling it to fund operations, growth, and expansion.
For example, if a company issues 1,000 shares for £2 each, the total share capital of that company would amount to £2,000. This financial structure plays a critical role in defining ownership and allocating rights among shareholders, as each share typically represents a proportion of ownership in the company.
Key Points to Remember About Share Capital:
- Issued Share Capital: The total value of shares that the company has issued to its shareholders.
- Called-up Share Capital: The portion of share capital that shareholders are required to pay; sometimes, shareholders might only need to pay part of the share's value upfront, with the rest "called up" later if needed.
- Paid-up Share Capital: The portion of called-up share capital that has been fully paid by the shareholders.
Understanding these terms is vital for entrepreneurs setting up a limited company, as they lay the groundwork for financial and ownership structures.
What Is the Legal Definition of Share Capital?
From a legal perspective, share capital is defined as the nominal value of all the shares in a company. The nominal value, also known as the "par value" or "face value," is the minimum price at which shares can be issued.
For example, if a company issues 500 shares with a nominal value of £1 each, the share capital would be £500. However, shares are often sold for more than their nominal value.
The extra amount is called “share premium” and is recorded in a separate share premium account.
Business owners and company directors need to be familiar with this legal framework, as it greatly impacts aspects like:
- Company registration requirements.
- Compliance with regulations enforced by Companies House or other governing bodies.
- Reporting and record-keeping obligations for issued share capital. To see the full list of documents you need to start a business click here
What Is Capital from Shares?
Capital from shares is the money a company gets from shareholders when it issues shares. It’s the foundation that keeps the company running. This funding can be used for a variety of things, such as:
- Buying equipment, technology, or upgrading infrastructure.
- Covering everyday costs like payroll or utilities.
- Creating new products or expanding into new markets.
If you’re thinking about setting up a limited company, it’s important to understand share capital—how it ties into ownership, rights, and funding—so you can set yourself up for long-term success.
Breakdown of Share Capital and Share Classes
To really get the idea of share capital, it helps to understand how it ties to share classes. Share classes are basically different types of shares a company can issue, each with its own set of rights and perks for shareholders. Here’s a quick example to make it clearer:
Share Capital Example:
Let’s say a company issues four shares, each priced at £1. That means the total share capital is £4.
Now, this is where share classes come in. For instance:
- Class A shares might come with extra voting power, giving those shareholders more say in company decisions.
- Class B shares, on the other hand, might not have voting rights but could offer bigger dividend payouts.
This setup is often a smart move by founders to keep control of the company while bringing in investors. For example, founders might hold onto Class A shares but sell Class B shares to outside investors.
Do You Need Share Classes When Forming a Limited Company?
For most new limited companies, there’s usually no need to create different share classes when incorporating. Most founders stick with a single type of ordinary shares since it keeps things straightforward for accounting and issuing dividends. That said, as your company grows, adding share classes can be a great way to customize shareholder rights to fit your business needs.
Keep in mind, that you can always introduce share classes later, but it does add some extra admin work and requires careful coordination with financial and legal teams.
Setting Up for Success
Debitam is here to help you form up your limited company and assist you in navigating through share capitals in the early days of your new venture.
Ready to level up your entrepreneurial journey? Partner with financial and legal experts to craft a share capital strategy that works for you. Make smart, informed decisions today to fuel your business growth tomorrow.
