What is 'share capital'?

[2Btoo]

Guys,

Numpty question coming up: what is 'share capital'?

I see 'share capital' listed on company accounts but don't know what it is. Indeed, my own company has share capital of £100, this being 100 shares of £1 each, but I don't know where this £100 came from (or has gone to).

Is it a company asset? Can it be used to count towards the value of a company? Can it be used to count as part of a company's solvency (or insolvency)?

Can anyone shed any light, using really small words, to help me out? Thanks!

[67Dino]

Share capital is just the money that the company has raised from selling shares. Your £100 was likely just money you put in when you started the company in the first place.

It has little to do with the valuation of your company. The valuation relates not to what the shares were originally sold for, but what they are worth now.

HTH

[Simpo Two]

67Dino said:

It has little to do with the valuation of your company. The valuation relates not to what the shares were originally sold for, but what they are worth now.

If the valuation relates to what the shares are worth now, then surely it's very much to do with the valuation of the company?

[2Btoo]

Thanks for the replies.

I don't recall putting any money into the company in the first place. Is this £100 therefore in the company or not?

Putting it another way, if my company has £10 in the bank account, is showing share capital of £100 and debts of £50 then is it insolvent?

Thanks!

[Tagteam]

Simpo Two said:

67Dino said:

It has little to do with the valuation of your company. The valuation relates not to what the shares were originally sold for, but what they are worth now.

If the valuation relates to what the shares are worth now, then surely it's very much to do with the valuation of the company?

It’s just the nominal value of the shares. Nothing to do with valuation.

[Simpo Two]

Tagteam said:

It’s just the nominal value of the shares. Nothing to do with valuation.

So if I owned a really big company, worth (say) £100M, and then it did really well and the share price doubled, it's still only worth £100M?

'Nominal' to me means 'virtually nothing'.

[MustangGT]

Simpo Two said:

Tagteam said:

It’s just the nominal value of the shares. Nothing to do with valuation.

So if I owned a really big company, worth (say) £100M, and then it did really well and the share price doubled, it's still only worth £100M?

'Nominal' to me means 'virtually nothing'.

Nominal, in this instance, means the face value of the share. When I set up my company I had 100 shares with a nominal value of 10p each. This meant I funded the company to the tune of £10 as they were fully-paid up. The share capital is also £10.

[anonymous-user]

2Btoo said:

Guys,

Numpty question coming up: what is 'share capital'?

I see 'share capital' listed on company accounts but don't know what it is. Indeed, my own company has share capital of £100, this being 100 shares of £1 each, but I don't know where this £100 came from (or has gone to).

Is it a company asset? Can it be used to count towards the value of a company? Can it be used to count as part of a company's solvency (or insolvency)?

Can anyone shed any light, using really small words, to help me out? Thanks!

As someone else has said, share capital is the money put into the company at the beginning of its life as its working capital.

You should differentiate between authorised share capital and issued paid up share capital.

A company may have authorised share cap of £100, and shares of £1 par value. Unless it amends its constitutional docs, it can only issue 100 shares and therefore raise £100.

It may though, only issue say 2 of those 100 shares, and so raise £2 of share capital. Then it has an authorised share cap of £100 and issued and paid up share cap of £2.

That point out the way, the issued and paid up share cap represents the money it has in the bank account on day 1 having done nothing.

Say, then, that on day 1 it has 100 shares all fully paid up. It has £100. In year 1 of trading it makes £50 of net profit. The net asset value of the co is £150, represented by £100 (shareholders’ funds) and £50 (balance on the p&l account). In principle those shares with a par value of £1 are now worth £1.50.

Say though in year 1 it makes a net loss of £75. Now its net asset value is £25, represented by £100 (shareholders’ funds) less £75 (the deficit balance on the p&l account). Now those £1 shares are worth 25p.

There are technical rules to restrict companies reducing their share cap (by returning money to shareholders) - creditors’ interests have to be protected if this is done.

Fundamentally paid up share capital is the bedrock of cash the company has - or had. Think of it as the stake money that investors (=shareholders) put in, which is either grown via profits or frittered away via losses.

Edited by anonymous-user on Saturday 17th September 15:03

[2Btoo]

BlackWidow13 said:

As someone else has said, share capital is the money put into the company at the beginning of its life as its working capital.

Plus more helpful stuff.

Thanks BW. That's all enormously helpful. And it fits with my vague and fuzzy understanding of what's going on (which is reassuring.)

[Eric Mc]

2Btoo said:

Thanks for the replies.

I don't recall putting any money into the company in the first place. Is this £100 therefore in the company or not?

Putting it another way, if my company has £10 in the bank account, is showing share capital of £100 and debts of £50 then is it insolvent?

Thanks!

Well, you should have. If you set up a limited company and decide that the company is going to issue 100 £1 shares to the shareholders, then, the shareholders should physically put £100 cash into the company bank account.
In many cases, such as yours, the shareholders never do this so, theoretically, the company has a debtor (money owed to it) in the form of its own shareholders.

In reality, it is quite likely that the money you owe to the company in the form of the unpaid share capital is more than compensated for by the amounts the company may owe you,

[akirk]

A company as discussed above is a limited company (or LTD.)
why limited? because your risk as a shareholder is limited by shareholding - to the value on the shares...

So, if you set up a company based on 100 £1 shares, you can:
- pay £100 into the company accounts - and then they are 'paid up' shares
- pay nothing - but in the event of the company folding, your liability will be limited to having to pay that £100

[Spinner20]

The reality is most people never pay the share capital in. A decent accountant sorts it out year one by “paying it” from the directors loan account. There are legal risks associated with not paying the share capital into a company so it’s recommended one way or another.