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Share capital explained
The phrase “share capital” refers to the funding provided by the owners of a limited company in exchange for a share of the business. Therefore, share capital is the total amount of money invested in the firm – the nominal value of the issued shares.
When they first get started, many limited companies decide to issue 100 shares at a price of one £1 each since this makes it simple to determine who holds what (each share is one per cent of the business). In addition, there are several distinct categories of shares that are commonly distributed in the UK, such as ordinary shares, preference shares, and redeemable shares.
The majority of shareholders own these shares, they are not subject to any specialized requirements or rights of any kind. Ordinary shareholders have voting rights, but if the firm is ever wound up, they will be paid out last of all the shareholders.
These shareholders do not have voting rights, but they do get dividend payments before other shareholders do. Because the dividend is paid out on a yearly basis and is predetermined, its amount is not tied in any way to the company’s overall profitability.
These provide the corporation with the ability to repurchase shares at some point in the future. Either the date will be predetermined or the company will decide when to make the purchase again. Because a corporation is required to also issue non-redeemable shares, it is impossible for the company to issue just redeemable shares.
The pros and cons of share capital
If you have a restricted budget but are seeking for a means to further grow your firm, considering the benefits of share capital could help you discover a solution.
The absence of payback obligations for the initial investment or interest payments is one of the advantages of obtaining capital through the sale of shares. This can make it more attractive than other kinds, such as bank loans and bonds, which are business debts.
Additionally, the business is free to spend any funds generated from the selling of shares as it sees fit. The funds are provided without conditions or restrictions. A creditor, on the other hand, has the power to place restrictions on the company’s ability to use the money they lent it.
Once an investor is on board, they will also commit to the business’ success. As such, your company will gain support from their expertise and experience with the common interest of seeing the business proliferates.
The sale of shares is a highly flexible method of raising capital. The company has complete control over the number of shares to issue, their initial price, and the timing of their distribution. If it intends to raise additional funds in the future, it can also issue additional shares. The corporation can also determine the sort of shares it issues and the rights they confer on shareholders. Business can also repurchase issued shares if it so chooses.
Finally, there is a substantially reduced possibility that the company will fail. If a firm is unable to make payments, shareholders do not have the rights to force the company into bankruptcy.
However, despite the fact that share capital may be an advantageous instrument for your company, there are a number of additional issues that you also need to take into consideration. When you sell stock, you are essentially relinquishing some degree of control over your company and placing it in the hands of your investors.
This is because your investors now own a portion of your company. As a result, you need to exercise caution over the proportion of your company that is sold, particularly given the fact that investors will have the opportunity to vote on factors including business deals, corporate strategy, and the manner in which the company is run.
If you have given away too much, and investors decide not to support your goals, you will lose control over the direction that your company is heading, and you may not be able to take advantage of critical chances. In point of fact, if they have a majority, you run the possibility of being ousted from your position as the leader of your own company and having someone else take your place.
In addition, it is important to keep in mind that investors anticipate a higher rate of return on their investments. This is mostly due to the increased level of risk that they are subjected to in the event that your company declares bankruptcy. As a consequence of this, the stock in your company is often offered to investors, but at a lesser cost, giving them the opportunity to recover some of the money they invested. In addition, you won’t be allowed to deduct any dividends that you’ve already distributed to shareholders.
However, share dilution also has a positive aspect. If 100 shares are distributed to 100 shareholders, for instance, each shareholder will own 1% of the company’s shares. A further 100 shares may be issued to bring the total number of shares to 200 when capital is urgently required, but each Shareholder’s share is then reduced to 0.5%. At first glance, this appears to be a bad thing, but after the company has successfully issued a capital request, funding for business expansion will be available. It means the value of the stock increases.
How to manage equity dilution?
Equity dilution occurs when a company issues new shares, which reduces the ownership stake of existing shareholders. This can happen if a company raises money from investors or if it undertakes a share buyback program.
There are several ways to manage equity dilution, including share capitalisation, share repurchase programs, and share dilution limits.
Share capitalisation is a way of issuing new shares without increasing the number of shares outstanding. This can be done by creating a new class of shares, such as preference shares, which have different voting rights or dividend rights.
Share repurchase programs allow companies to buy back their own shares, which reduces the number of outstanding shares and dilutes the ownership stake of remaining shareholders.
Share dilution limits can be put in place to restrict the issuance of new shares or the buyback of existing shares. These limits can be set by the company’s articles of association or by shareholders at a general meeting.
By taking steps to manage equity dilution, you can protect the interests of your existing shareholders and ensure that your company remains on solid footing.
What is nominal share value and how to calculate it?
The phrase “nominal value of shares” refers to the minimum value that has been decided upon for a specific type of shares that have been issued by the company. This value can be calculated by dividing the value of the company’s total paid-up share capital by the total number of shares that are outstanding at any given point in time.
It is necessary for each class of shares to have a predetermined nominal value per share (for instance, one pound). Even in the event that the company becomes insolvent, the maximum amount that a shareholder is obligated to give to the company is the amount that they first invested (being the nominal value of their shares). The market value of the shares, which can be much higher than the nominal value, is not the same as the value that is printed on the share certificates.
Can you adjust your share capital?
In most cases, shareholders are not permitted to request the return of their share capital because it legally belongs to the firm and not to them as individuals. Therefore, it is the responsibility of the directors to maintain the share capital of the corporation.
A company’s share capital can be changed in a variety of different ways depending on the situation. Because of the potential complexity of this process, we strongly recommend that you seek the assistance of a specialist.
The following is a list of the primary methods by which you can adjust your share capital:
What if you want to increase your share capital?
Share capital may be increased at any moment during the existence of a UK limited company at the shareholder’s discretion. Companies House accepts applications for modification either via their website or by the postal service.
The completion of Company House’s Form SH01 is required in the event that an increase in a company’s share capital has taken place. Either the paper version of Form SH01 or the online web filing facility provided by Companies House can be used to submit this form. The online version is likely the simpler of the two available choices to complete.
How about decreasing your share capital?
A capital reduction occurs when a firm reduces the quantity of its share capital.
It is possible for a UK company to reduce its share capital in a variety of ways, for instance, private business can cut its share capital through a shareholder resolution supported by court permission or a statement of solvency signed by all directors.
Despite the range of means to cut share capital, the outcomes will often boil down to repaying the company’s shareholder in cash. This process can be arduous if you are not a fan of cumbersome paperwork. It’s never too late to seek help from an expert through in-depth consultation, get in touch with us today.
You can also gain a head start by filling out the statement form issued by the UK government dedicated to capital reduction – SH19.
Why should you set up a company limited by share?
Establishing a company that is limited by shares, which is the same thing as incorporating a business, is advantageous for a number of reasons, including the following:
- For the purpose of ensuring that you will not be held personally accountable for the debts of a company in the event that it goes bankrupt (unless you have provided a guarantee to a bank or have mishandled the business).
- In order to ensure that your business is taxed independently from you personally.
- In order to avoid taking out loans for the finance of the business, you should consider issuing shares instead.
- This will make it much simpler to sell your company.
- Therefore, you can entice investment by benefiting from investment plans that are designed for growing firms, and/or you can issue shares to employees as an incentive.
Explore more about private limited companies in the UK. If you need assistance in terms of administration and the process of forming a private limited company in the UK, contact us to set up a consultation today.
In addition to private limited companies, limited liability partnerships can share capital through the use of a Partnership Agreement.
What is issued capital and how should I decide the number of shares that will be issued?
Once a shareholder’s name is recorded into the register of members of a corporation, the shares are considered to have been issued. Therefore, if you give new shares to existing shareholders or new shareholders, you are required to immediately update the register of members for your company as quickly as possible.
It is up to the owner of a small company to decide how many shares to issue, and there are no hard and fast laws regarding this matter. If you are a lone proprietor who has made the decision to incorporate your business, you may choose to hold a single share in the company.
It is crucial to know the percentage of a firm’s stock that is owned by each shareholder because having shares in a corporation provides the owner the authority to manage that company. For instance, a shareholder who has a single share in a firm is considered to own that company in its entirety. If two shares of an equal value have been issued, and each of these shares is owned by a different person, then each shareholder will own fifty percent of the company, and so on.
The vast majority of businesses start out with what are known as “ordinary” shares, in which case each share has an equal right to vote and receive dividends from the company. You also have the option of issuing several classes of shares, each of which confers its holders with a unique set of rights, including a unique set of voting rights, a unique set of profit-sharing rights, and a unique set of rights in the event that the business is liquidated (wound up).
Frequently Asked Questions
What's the share premium?
Commonly, the true value of a share, as opposed to its nominal value, is typically quite low. However, depending on the level of success that a company has achieved, the actual value of a company’s shares may be far higher than their nominal value. When shares are issued at a price that is higher than their nominal value, this is referred to as the shares being issued at a “premium.” The term “premium” also refers to the difference between the nominal value of a share and its actual value.
If your company decides to issue shares at a premium, it is required to deposit the total amount of the premium into a distinct account that is referred to as a “premium account.” These funds are referred to as “non-distributable reserves” since they cannot be used for the purpose of paying dividends. They have a restricted range of applications, so you can only utilize them in a few different scenarios.
What are pre-emption rights?
When you allot new shares, you need to know whether the existing owners have rights of pre-emption. These rights allow existing shareholders to get first dibs on newly issued shares. Existing shareholders are granted pre-emption rights, which provide them the right of first refusal to purchase fresh shares of the firm. This allows them to prevent their ownership stake from being diluted and to keep their current percentage of the business.
The law provides shareholders with an automatic right to pre-emption, but the articles of association for a private corporation have the ability to exclude shareholders from using this power. A special decision of the company’s shareholders or a clause in the Articles of Incorporation can be used to remove the statutory pre-emption rights for particular allotments, which is another option.
You are not allowed to allot a discount to the nominal value of the shares.When you allot shares, you are required to comply with a number of documentation and filing requirements imposed by Companies House.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
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