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company-structure

What is Share Capital?

Share capital is the money invested in a company by shareholders in exchange for shares. It represents the initial and subsequent investments.

Example

You form a company with £100 share capital (100 shares at £1 each). This £100 belongs to the company.

Key Dates

Recorded when company is formed and when new shares issued

How Share Capital Works in Practice

Share capital is the total nominal value of shares that have been issued by a company to its shareholders. It represents the equity investment that shareholders have made in the company. When you form a company, you decide how many shares to issue and at what nominal (par) value. Most small companies start with 1 share at £1, 100 shares at £1 each, or 1,000 shares at £1 each. The nominal value does not have to reflect the true value of the shares.

There are several related terms that are important to understand. 'Authorised share capital' was the maximum number of shares a company could issue, but this concept was abolished by the Companies Act 2006 -- companies can now issue as many shares as their articles allow. 'Issued share capital' (or 'allotted share capital') is the total nominal value of shares that have actually been issued. 'Called-up share capital' is the amount shareholders have been asked to pay. 'Paid-up share capital' is the amount actually paid by shareholders. In most small companies, all shares are fully paid up on issue.

Shares can be issued at a premium -- that is, for more than their nominal value. For example, if you have £1 nominal shares but the company is now worth more, a new investor might pay £10 per share. The extra £9 per share is recorded in a 'share premium account' on the balance sheet. Share premium is not distributable as dividends; it forms part of the company's permanent capital.

Share capital is classified as equity on the balance sheet and forms part of shareholders' funds. It is one of the most permanent sources of funding because, unlike loans, it does not need to be repaid. The company can only reduce its share capital through formal procedures (a special resolution and either a court order or a solvency statement from the directors).

Step by Step

When you incorporate a company, the subscribers named in the memorandum of association agree to take at least one share each. The shares are issued, and the subscribers pay the nominal value (or more if issuing at a premium). The company records this in its register of members and files the statement of capital with Companies House.

If the company needs more capital later, it can allot new shares. The directors must have authority to allot shares (either from the articles or a shareholder resolution). Existing shareholders typically have pre-emption rights -- the right to be offered new shares before they are offered to outsiders -- unless these rights are disapplied by a special resolution. New allotments are filed with Companies House using form SH01 within one month.

Shares can also be transferred between parties. A transfer involves the seller completing a stock transfer form and the buyer paying Stamp Duty if the consideration exceeds £1,000 (at 0.5% of the price). The company updates its register of members to reflect the new ownership. Share transfers do not change the total share capital of the company.

Practical Tips

  • Start with 100 shares at £1 each -- this gives you flexibility for percentage calculations and future share transfers without dealing with fractional shares
  • Always ensure shares are fully paid up at the time of issue to avoid future calls on capital and complications in the event of insolvency
  • If bringing in an investor or new shareholder, consider the share premium carefully and get a proper valuation to avoid tax disputes
  • Keep your register of members up to date and file any changes to the statement of capital promptly with Companies House

Common Mistakes to Avoid

  • Confusing nominal share value with market value -- a £1 share can be worth much more (or less) than £1 depending on the company's performance
  • Issuing too many shares at incorporation without thinking about future dilution -- if you start with 100 shares and want to bring in a 10% investor, you issue 11 new shares; if you start with 1 share, the maths is awkward
  • Not paying for shares that have been issued -- unpaid share capital remains a liability of the shareholder and can be called upon by liquidators
  • Attempting to reduce share capital without following the correct legal procedure, which requires a special resolution and either a court order or solvency statement

Frequently Asked Questions

How much share capital should I start with?

Most small companies start with 1 to 100 ordinary shares at £1 each. There is no minimum share capital requirement for a private limited company. Start simple -- you can always issue more shares later if needed.

Does more share capital mean a more valuable company?

No. Share capital is simply the nominal investment amount. A company with £100 share capital could be worth millions if it has significant retained profits and assets. The nominal value is essentially an accounting entry.

Can I use share capital for business expenses?

Yes, once shareholders pay for their shares, the money belongs to the company and can be used for any legitimate business purpose -- buying equipment, paying salaries, covering operating costs, and so on.

What is the difference between share capital and retained profits?

Share capital is money invested by shareholders in exchange for shares. Retained profits are accumulated profits after tax that the company has chosen not to distribute as dividends. Both appear as equity on the balance sheet, but only retained profits are distributable as dividends.

Source: Companies House guidance on shares and share capital: https://www.gov.uk/running-a-limited-company and Company Taxation Manual (CTM00500): https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual

Related Terms

Shareholder

A shareholder is someone who owns shares in a company. They're entitled to dividends and have voting rights on company decisions.

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