What is share capital?
Share capital is the money a limited company raises by issuing shares, recorded at the shares' nominal value in its balance sheet.
What share capital means
When a limited company is formed, its owners subscribe for shares. The amount they agree to pay for those shares is the company's share capital. It forms part of equity on the balance sheet and represents the owners' permanent investment in the company.
Each share has a nominal (or par) value, often £1 or even 1p. Many small companies are set up with 100 shares of £1, giving share capital of £100. If shares are later sold for more than their nominal value, the excess is recorded separately as share premium.
Key terms
- Issued share capital: the shares actually given to shareholders.
- Paid-up share capital: the part shareholders have paid for. Shares can be issued unpaid, leaving the holder owing the company.
- Share classes: ordinary shares usually carry votes and dividends; other classes can have different rights, such as separate dividend rates.
Example
Two founders set up a company with 100 ordinary £1 shares, 50 each, and pay £100 in total. Share capital is £100.
A year later an investor buys 25 new shares for £20,000. The nominal value is £25, so share capital rises to £125 and £19,975 is recorded as share premium. The investor now owns 25 of 125 shares, or 20%, and the company files form SH01 with Companies House within a month of the allotment.
Why it matters for your business
Share capital decides who owns the company and in what proportion, and therefore how dividends and votes are split. Dividends are paid per share of a class, so getting the structure right at the start matters. Setting up different share classes, for example so a spouse can receive dividends separately, has tax consequences and should be planned properly.
Share capital cannot normally be paid back to shareholders as if it were profit. Dividends can only come from retained earnings, not from share capital or share premium.
How much share capital do you need?
There is no minimum for a UK private limited company; one share of 1p is legally enough. Most founders choose a small round number. Keeping the nominal value low means shareholders do not owe the company a large sum for unpaid shares, while still allowing ownership to be divided flexibly.
Common questions
No. Share capital is the amount shareholders invested for their shares, shown in the equity section of the balance sheet. The cash may since have been spent on running the business. It is a record of the investment, not a fund kept aside.
Not freely. Returning share capital requires a formal reduction of capital or a share buyback, both with legal procedures and possible tax consequences. Money taken out should normally be salary, dividends from profits or repayment of a director's loan.