Finance

What is Share Capital? Understanding The Basics

June 26, 2023

5 minute read

Table of Contents

Share capital is an integral part of any company’s finances. It represents the amount of money invested by shareholders in exchange for ownership stakes in the company. This blog will cover everything you need to know about share capital, including its definition, advantages, and disadvantages. We will also explain the different types of share capital and how to calculate it. Additionally, we will discuss the difference between authorized and issued capital and the tax implications of share capital. Understanding the basics of share capital can help companies make informed decisions regarding their finances and investments, so let’s dive right in!

Share capital refers to the portion of a company’s equity that is raised through the sale of shares to investors. When a company decides to go public, it will issue stock shares in exchange for investors’ funds. These funds are then used to finance the company’s operations, growth, and expansion. Share capital can be divided into two categories: authorized share capital and issued share capital. Authorized share capital refers to the maximum number of shares that a company is allowed to issue, while issued share capital refers to the actual number of shares that have been sold and are currently held by investors. A company’s share capital can also impact its financial standing and ability to attract potential investors.

1. Financial Flexibility

Companies benefit significantly from share capital as it offers them immense financial flexibility. This advantage empowers organizations to raise funds from diverse channels and pursue growth opportunities confidently. Shareholders play a crucial role in this process by becoming part owners of the company and having a vested interest in its success. The availability of share capital also comes in handy when attracting new investors or improving a company’s creditworthiness. Hence, opting for share capital over traditional borrowing methods can be less risky for businesses in the long run.

2. Limited Liability

The share capital has several advantages for businesses looking to raise funds through equity financing. One such advantage is limited liability protection for shareholders. Share capital safeguards shareholders’ personal assets in case of business failure. This protects them from financial losses beyond what they have already invested in the company. As a result, investing in a company’s shares can be less risky than other investment options. Additionally, limited liability makes it easier for companies to attract investors and raise capital.

3. Improved Image and Reputation

Share capital has a significant impact on a company’s image and reputation. Incorporating share capital into a company provides it with legitimacy, improving its credibility among investors and stakeholders. Moreover, investors who purchase shares have a vested interest in the company’s success, resulting in greater support for the brand. Shareholders can also potentially access more funding opportunities, leading to the expansion of operations.

Professional advice is recommended when considering share capital as several factors, such as balance sheet, dividend, nominal value, par value, number of shares, common stock, preferred stock, paid-in capital, and additional paid-in capital, come into play. Additionally, it is essential to understand various types of share capital, like common shares or preference shares and their influence on the market value of the issuing company. A shareholder’s agreement must be developed while incorporating share capital to ensure proper management.

1. Loss of Control

Existing shareholders must be cautious regarding their ownership percentage in a company’s share capital. Dilution of ownership can lead to a potential loss of control over business decisions. Some companies implement dual-class structures to maintain certain shareholders’ control and avoid this problem. It is crucial to seek professional advice and review organisations’ articles of association and clauses in shareholder agreements to safeguard ownership rights in case of incorporation or issuing new shares at a later date.

2. Financial Obligations

Raising share capital has its perks but also comes with financial obligations that cannot be overlooked. Shareholders expect regular dividends, while the company may have to pay interest rates on loans taken out for purchasing shares. Issuing new shares dilutes existing shareholders’ ownership, affecting their control over decision-making. Financial implications must be thoroughly evaluated before incorporating this type of equity capital into a business’s balance sheet. To ensure proper evaluation, seek professional advice and draft a shareholders’ agreement that includes clauses on pre-emption rights in accordance with Companies Act regulations and articles of association.

3. Conflicts with Shareholders

To ensure a company’s long-term success, managing shareholder relationships is critical as potential conflicts with shareholders can arise due to differing goals and agendas from the company’s management. Clear communication channels and strong governance structures should be in place to manage these conflicts effectively. This highlights one of the main disadvantages of share capital- potential conflicts with shareholders- which companies must consider before deciding to raise share capital.

Equity share capital is the money that shareholders invest in a company in exchange for ownership rights. The funds are used to finance the company’s operations and expansion. Equity shares give the owner the right to vote on company matters and to receive dividends.

Preference share capital is money that shareholders invest in a company in exchange for preference shares. Preference shares entitle the holder to receive certain benefits, such as priority dividends and repayment of capital, before other shareholders. However, preference shares typically do not confer voting rights.

Calculating share capital is an important step in determining the value of a company. To calculate share capital, you need to multiply the number of shares issued by the company by the nominal value of each share. For example, if a company has issued 10,000 shares with a nominal value of £1 per share, then its share capital would be £10,000.

It is important to note that share capital can fluctuate over time as companies issue new shares or buy back existing ones. Additionally, different types of shares may have different nominal values or voting rights, which can affect the overall calculation of share capital. It is recommended to consult with a financial expert or accountant to ensure accurate calculations and understanding of relevant laws and regulations.

When it comes to sharing capital, there are several tax implications that companies should be aware of. One of the main considerations is the taxation of dividends paid to shareholders. Dividends are generally subject to income tax, although some exceptions and reliefs are available. Another important factor to consider is the taxation of any gains made on the sale of shares. Depending on the length of time that shares are held, they may be subject to capital employed gains tax. It is important for companies to keep accurate records of share transactions and seek professional advice on the tax implications of any proposed actions related to share capital. By staying informed about these tax implications, companies can ensure that they remain compliant with relevant regulations and optimize their financial outcomes.

Conclusion

In conclusion, share capital is essential to a company’s financial structure. It provides financial flexibility, limited liability, and improved reputation to the business. Share capital also comes with some drawbacks, such as loss of control, financial obligations, and conflicts with shareholders. There are different types of share capital, including equity shares, preference shares, and bonus shares. Calculating share capital involves multiplying the number of shares issued by their par value. Understanding the difference between authorized and issued capital is crucial for companies looking to raise funds through equity. Finally, tax implications of share capital depend on the type of shares issued and the country’s tax laws.