Share capital

A corporation's share capital, commonly referred to as capital stock in the United States, is the portion of a corporation's equity that has been derived by the issue of shares in the corporation to a shareholder, usually for cash. "Share capital" may also denote the number and types of shares that compose a corporation's share structure.

Definition

In accounting, the share capital of a corporation is the nominal value of issued shares (that is, the sum of their par values, sometimes indicated on share certificates). If the allocation price of shares is greater than the par value, as in a rights issue, the shares are said to be sold at a premium (variously called share premium, additional paid-in capital or paid-in capital in excess of par). Commonly, the share capital is the total of the nominal share capital and the premium share capital. Most jurisdictions do not allow a company to issue shares below par value, but if permitted they are said to be issued at a discount or part-paid.

Sometimes, shares are allocated in exchange for non-cash consideration, most commonly when corporation A acquires corporation B for shares (new shares issued by corporation A). Here the share capital is increased to the par value of the new shares, and the merger reserve is increased to the balance of the price of corporation B.

In practice, the concept of "par value" has very little meaning, since shares usually represent a residual claim; they do not endow their owners with a claim toward any fixed sum of money. In some jurisdictions, share par values have been either abolished or made optional, so a corporation can issue shares having no par value. In that case, from an accounting perspective, all of the corporation's share capital is premium.

Besides its meaning in accounting, described above, "share capital" may also describe the number and types of shares that compose a corporation's share structure. A corporation might have an "outstanding share capital" of 500,000 shares (the "structure" usage); it has received for them a total of 2 million dollars, which is the "share capital" in the balance sheet (the accounting usage).

The legal aspects of share capital are mostly dealt with in a jurisdiction's corporate law system. An example of such an issue is that when a company allocates new shares, it must do so without inequitably diluting its existing shareholders.

Legal capital

Legal capital is a concept used in UK company law, EU company law, and various other corporate law jurisdictions to refer to the sum of assets contributed to a company by shareholders when they are issued shares. The law often requires that this capital is maintained, and that dividends are not paid when a company is not showing a profit above the level of historically recorded legal capital.

Minimum capital

In the UK, a public limited company must have a minimum legal capital of £50,000. There is no such requirement for a private company.

Classes of shares

The share capital may be made up of more than one class of shares. Different classes of shares include ordinary shares, preference shares, growth shares and deferred shares. Shares will be a separate class if the rights attached to them differ from the rights attached to other shares in the capital of the company.

See also

• Balance sheet
• Capital impairment
• Market capitalization
• Paid in capital
• Share premium account
• Shareholders' equity
• UK company law