How to Calculate Share Capital (with Example)

Share capital, also known as capital stock, is the fund raised by a company through the issuance of common stock (ordinary shares) and preferred stock (preference shares). These shares represent ownership in the company and give shareholders a claim on the company's assets and profits. Share capital is a critical element of a company's financial structure, as it not only helps raise funds for the company’s operations and growth but also determines the extent of ownership and control that shareholders have. While the concept of share capital is relatively straightforward, its different types and their specific purposes can be complex. Here, we will explore the various types of share capital, their significance, and how they contribute to the functioning of a company.

Types of Share Capital

The concept of share capital can be broken down into several categories, each serving a distinct purpose. These include Authorised Share Capital, Issued Share Capital, Subscribed Share Capital, Paid-Up Share Capital, and Unpaid Share Capital.

1. Authorised Share Capital

Authorised Share Capital (also known as Nominal Capital) refers to the maximum value of shares that a company is legally permitted to issue to its shareholders, as specified in its constitutional documents, such as the company’s articles of association. This is the upper limit set by the company’s founders or its board of directors when the company is incorporated.

For example, if a company’s authorised share capital is set at $10 million, it means that the company can issue shares up to that total value, but it cannot legally issue more shares without amending its articles of association or obtaining approval from shareholders. The authorised share capital is not necessarily the amount the company will issue immediately; it represents a potential, not an obligation, to issue shares in the future.

The concept of authorised capital provides flexibility for a company to raise funds over time as needed without having to constantly alter its legal structure. This can be beneficial for the company in planning its future financing needs, especially in the case of expansion, mergers, or other capital-intensive projects.

2. Issued Share Capital

Issued Share Capital refers to the nominal value of the shares that a company has actually issued to its shareholders. This is a subset of the authorised share capital, representing the amount of capital that has been raised through the issuance of shares to investors. When a company issues shares, it effectively sells ownership stakes in the company to its shareholders in exchange for capital.

Issued share capital is a key figure in assessing how much capital the company has raised from its shareholders and how many shares are in circulation. The shares may be issued in different stages depending on the company’s needs, and the total value of the issued capital may increase or decrease over time through additional share offerings or share buybacks.

It’s important to note that while the authorised capital represents the maximum limit of shares that a company can issue, the issued capital refers to the actual value of shares that have been distributed to investors. A company may not issue all of its authorised capital at once. For instance, a company may have an authorised share capital of $5 million but only issue $2 million worth of shares initially. The remaining $3 million worth of shares remains available for future issuance.

3. Subscribed Share Capital

Subscribed Share Capital refers to the part of the issued capital that investors have agreed to take up. It represents the amount of the company’s capital that shareholders have formally subscribed to, often as part of a public or private offering. While the terms "issued" and "subscribed" are sometimes used interchangeably, there is a subtle difference: Issued capital refers to the amount of capital the company has offered to investors, while subscribed capital refers to the amount that investors have accepted or pledged to purchase.

In most cases, the amount of subscribed capital is equal to or less than the issued capital. If all issued shares are taken up by investors, the subscribed capital and issued capital will be identical.

4. Paid-Up Share Capital

Paid-Up Share Capital refers to the portion of the subscribed share capital that shareholders have actually paid for. Not all shares are paid for in full at the time they are issued; some shares may be issued with the provision for payment in installments. Paid-up capital represents the actual cash (or other assets) the company has received from shareholders in exchange for the shares issued to them.

For instance, if a company issues 100,000 shares at a nominal value of $1 per share and shareholders have paid $1 per share, the paid-up capital is $100,000. If some shares are issued as partly paid shares, with only a portion of the price paid upfront, then the paid-up capital would be lower than the total nominal value of the shares issued.

5. Unpaid Share Capital

Unpaid Share Capital is the opposite of paid-up capital. It refers to the portion of the share capital that shareholders have subscribed to but have not yet paid. This may occur if shares are issued with installment payments or if shareholders are given more time to pay for the shares.

Unpaid capital can represent an obligation for shareholders to pay the remaining value of their shares, and while this does not immediately impact the company’s available funds, it could eventually lead to an inflow of capital if the unpaid amounts are collected.

Importance of Share Capital

The share capital of a company serves multiple key functions that are essential for the company's functioning, its financial stability, and its growth. Below are some of the critical roles share capital plays in corporate life:

1. Raising Funds for Operations

One of the primary reasons a company issues share capital is to raise funds to support its business operations and expansion. Shareholders provide the company with capital in exchange for equity ownership. This money can be used for a variety of purposes, such as funding new projects, acquiring assets, paying off debts, or investing in research and development.

Unlike debt financing, where a company borrows money and incurs interest obligations, equity financing (through share capital) does not involve recurring interest payments. Instead, the company must share its profits with shareholders in the form of dividends and retain ownership in the company.

2. Defining Ownership and Control

Share capital determines the ownership structure of a company. Shareholders are the owners of the company, and the number of shares they hold determines the extent of their ownership. In a public company, the ownership is distributed among many shareholders, and their collective vote is used to make decisions on key matters, such as the appointment of directors and approval of major company actions.

Preferred stockholders may have certain privileges over common stockholders, such as a fixed dividend or priority in the event of liquidation. The more shares a person or institution holds, the greater their influence on company decisions.

3. Establishing a Capital Base

Share capital provides a company with a solid capital base. The value of share capital is important because it gives creditors and other stakeholders confidence in the company’s financial stability. It acts as a cushion for the company in times of financial difficulty, as it represents the amount of capital shareholders have invested in the business, which can be used to absorb losses.

A company’s share capital is also important in terms of its ability to raise further capital. A solid and stable share capital base makes it easier for a company to issue additional shares, raise debt, or attract investors in the future. Investors and financial institutions often assess the amount of share capital when deciding whether to invest in or lend to a company.

4. Legal Requirements and Compliance

In many jurisdictions, companies are required by law to maintain a certain level of share capital. The authorised capital represents the maximum amount a company is legally permitted to raise, while the issued capital reflects the actual amount that has been raised. By maintaining adequate levels of share capital, companies ensure that they are in compliance with regulatory requirements and demonstrate their ability to meet their financial obligations.

Learn how to calculate share capital with the following example:

Formula:
Authorized capital = Number of permitted shares x par value
Issued capital = Number of shares actually issued x par value

Example:
A company issued 10,000 ordinary shares (nominal value of $1 each) at a subscription price of $6 per share, and 5,000 7% preference shares (par value $0.50) at a price of $5 per share. Then,
Issued Share Capital = 10,000 x $1 + 5,000 x $0.50 = $12,500