When a limited company gets incorporated, which you can do for free at MachFast, it must assign a ‘nominal’ value to each share upon incorporation, i.e. £1 or £0.10. This nominal value represents the sum the shareholders must pay for each share they own, should the company go bankrupt – this is known as the shareholder’s limited liability.
A company with only one director can be set up with just one share issued. This would be fine for a small business that does not need to trade equity for resources or investment.
The ‘share capital’ however, refers to the total nominal value of all the shares which have been issued by a company. For instance, if a company has 100 shares that are £0.01 each, the company’s share capital will be £1. The MachFast app defaults each shareholder to 100 shares with a nominal value of £0.01.
Although nominal share capital is important to understand the liability of the shareholders, it does not correspond to the value of the company. This is determined by the current market value of each share which is, on the whole, higher than the nominal value. The ‘share premium’ is the difference between the nominal value and the market value of each share.
Should I Increase my Share Capital?
An advantage of having shares is that they represent the ownership of a company. Therefore having more shares allows your company to trade sections of itself to others for outside investment, skilled work or resources. If a company doesn’t have enough shares for this, then it becomes imperative to issue more shares – thereby increasing its share capital.
New shares may be sold or given to existing shareholders’, through a stock transfer form. However, increasing your business’ share capital often will reduce the value of any existing shares as there will be more shareholders to split the earnings of any dividends with.
A way to get around the problem of creating new shares, is by creating them at the inception of the company. Rather than setting up your company with one £1 share, for example, setting it up with 100, and a nominal value of £0.01 per share gives you the ability to distribute these 100 shares without creating new ones.
From here your company can attract investors, partners or employees with relative ease. If you have more than one shareholder and/or intend to raise more money in the future, you can create as many shares as you wish when you register your company. MachFast app will automatically create 100 shares for each shareholder, but you can change that number to any that you wish.
How many Shares do I Need to Go Public?
Most limited companies do not go public, but some high growth start ups will do an Initial Public Offering and list their shares on exchanges.
In order to go public, your share capital must be a minimum of £50 000. This is known as the ‘authorised minimum’ and was set under the companies act of 2006.
Becoming a public company means your shares can be bought on the London Stock Exchange or any other exchange where you may choose to list your shares. If your business does well, your shares will increase their market value giving the opportunity for your company to generate significant return on investment for its shareholders.
4 Advantages of Large Share Capital
- As seen above, you need at least £50 000 worth of share capital to go public. Having large share capital allows this to happen.
- Lenders and Creditors can sometimes assess the financial strength of your company on the size of your share capital. Having a large share capital gives your business access to more funding this way.
- Some trade organisations have a minimum share capital requirement for entry.
- Using increased share capital as a loan – some businesses like to increase their share capital rather than taking out a loan. This comes with various perks:
- There are no interest payments
- There are no restrictions to capital raised from shares, as opposed to a bank loan where the funds may only be used for a specified purpose.
- Although dividends are often paid to shareholders, there is no obligation to pay dividends.
NOTE! – Although increasing your share capital can often make your business seem more financially secure to investors, this may not represent your actual financial security. Experienced investors are likely not to put a company’s financial security down to a higher share capital.
4 Disadvantages of Large Share Capital
- Increasing share capital can often dilute the value and worth of existing shares owned by various shareholders. Consequently, dividend pay outs and voting rights can change.
- Increasing share capital through the allotment of new shares will reduce the founder’s level of control over the company.
- At its worst, a company that issues too many shares can be taken over by its competitor – who would have to buy a majority of the company’s shares.
- A larger share capital means that the owners have more liability. Therefore rather than being liable for a £1 share they could be liable for a £800 share. The shareholders liability increases with each share owned.
How to Increase the Share Capital of your Company
Usually to increase the share capital of your company, it is necessary to issue more shares; this is known as “an ordinary allotment of shares”. You can find the official legislation on increasing your share capital in Part 17, Chapter 2 of the Companies Act 2006.
Fundamentally, the procedure consists of a vote being taken as a general meeting of shareholders, a board meeting of directors or as a write resolution. The vote requires a simple majority to pass through.
Within a month of the allotment of shares having taken place, HMRC’s Companies House must be notified through a Form SH01. Once this is completed, the register of members needs to be updated and the new share certificates should be issued within two months.
How to Reduce the Share Capital of your Company
You can reduce your share capital in two ways:
- For private limited companies: you can reduce your share capital through a special resolution supported by a solvency statement from the directors.
- For public limited companies: you can reduce your share capital through a special resolution with confirmation of the court.
The official legislation for reducing your share capital is under Part 17, Chapter 10 of the Companies Act of 2006.
Within 15 days of passing the resolution, Form SH19, along with a copy of the shareholders’ special resolution, a directors’ statement of solvency, and a directors’ compliance statement need to be sent to Companies House.
Did you find this helpful? If so check out our other blogs designed to help small business owners like you. Below are a few blogs that you might find helpful in giving your company the upper edge in a competitive market.
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