What is the share capital of a company?
Everyone who is going to found a company wonders what the share capital of a company is and what it is for. At JLA Notarios, notary Barcelona, we want to delve deeper into this concept.
Share capital as a concept
Share capital could be defined as the monetary amount that expresses the sum of the monetary or non-monetary contributions that each partner contributes to the company, without the right to repayment, in exchange for the social shares or shares that grant them that status as a partner.
It should be noted that share capital is not a free figure, but must respect minimums according to article 4 of the Capital Companies Act. Thus, for limited companies it is 1 euro although it is recommended to contribute more to guarantee their solvency, and for public limited companies it is 60,000€. In no case can this figure be lower, according to article 5, section 1, "deeds of incorporation of capital companies with a share capital figure lower than the legally established shall not be authorised, nor deeds of modification of the share capital that reduce it below that figure, unless it is a consequence of compliance with a law."
You can consult more about the minimum capital of a limited company in the following article:
What is the purpose of a company's share capital?
The significance and importance of a company's share capital comes from the functions it fulfils, which are as follows:
- Starting the activity. The primary function of the share capital is to provide a company, which has just been established, with sufficient funds to be able to start its activity.
- It is a figure of responsibility and guarantee towards third parties. In SL or SA companies, the partners are not liable for the company’s debts with their personal assets, but only with the contributions made. For this reason, companies must have a sufficient capital figure to offer asset coverage to creditors or third parties outside the company.
- It is a retention figure. It fulfils an important accounting function, as the company is required to keep a balance sheet, with the share capital as the first item of liabilities, as we will see later, and profits cannot be distributed until the net accounting equity exceeds the share capital figure (art. 273 Capital Companies Act).
- It determines each partner’s position in the company, since each partner’s participation in the share capital, through the contributions made by them, determines the percentage of their respective rights within the company, for example, the percentage of dividends they are entitled to or the voting rights.
- It is a means of investment. In public limited companies, the incorporation of shares into securities or book entries facilitates companies’ access to capital markets.
Thus, the function of share capital is fundamental in the operation of a company. Now that you know what a company’s share capital is and what it is for, let us learn about other concepts.
Differences between equity and share capital
Share capital should not be confused with the figure of social equity, as they are concepts that, although they may have some relation, are different.
- Share capital is a legal concept that refers to the fixed and conventional figure set out in the statutes, whereas equity is an economic concept that refers to the set of assets, rights and economic obligations belonging to the company at any given time.
- Share capital has a stable and constant nature, without prejudice to the fact that it may undergo changes due to increases or reductions in share capital, but always subject to prior company agreement. On the other hand, equity fluctuates continuously, depending on the results of the company’s activity.
From the characteristics outlined, there is an important relationship between both figures, share capital and equity, as it reflects the economic state of a company. As the value of equity exceeds the figure of share capital, the situation will be more solid, since the company is growing economically. Conversely, if the former decreases relative to the latter figure, it will mean that losses have been absorbing the funds contributed by the partners.
Share capital in the balance sheet
The share capital of a company is made up of monetary and non-monetary contributions. Due to the guarantee functions mentioned above, it is considered a liability in the balance sheet.
The balance sheet is a document that represents the financial position of a company at a specific point in time. It shows data relating to assets, equity, and liabilities, within which the share capital is included.
Liabilities show all the debts and obligations incurred by the business. It is divided into:
- Current liabilities. Consisting of short-term debts and obligations such as employee wages and taxes.
- Non-current liabilities. Long-term obligations and debts. This includes loans and credit lines requested.
- Equity. This includes the contributions of the partners and, therefore, the share capital. It also reflects profits and earnings.
The calculation of share capital
We are also often asked about the calculation of share capital. Considering it essential in this article about what share capital is, we explain it below.
How to calculate the share capital?
Calculating the share capital of a company is quite straightforward. The first thing we must do is add up all the assets and all the liabilities that the business has. Subsequently, we subtract the total liabilities from the total assets. The result will be the net equity.
Once we have the net equity, we must deduct the legal reserve. For example, according to the capital companies law, limited companies must reserve 10% of their annual profits with a maximum of 20% of the subscribed share capital. If this was €3,000, this concept would amount to a maximum of €600.
Finally, from the amount resulting from subtracting the legal reserve from the net equity, we must also deduct the retained earnings from previous years. That figure will be the share capital.
Increase and reduction of capital
All companies can, according to the Companies Act, increase and reduce their capital.
Reduction of a company's share capital
The reduction of share capital is the corporate resolution by which it is decided to decrease the amount of share capital, without it ever being able to be less than the minimum share capital amount.
According to article 317 of the Capital Companies Act, "the reduction of capital may aim to restore the balance between the capital and the net assets of the company diminished as a result of losses, the constitution or increase of the legal reserve or voluntary reserves, or the return of the value of contributions. In public limited companies, the reduction of capital may also aim to forgive the obligation to make outstanding contributions.
The reduction may be carried out by decreasing the nominal value of the company shares or stocks, their redemption, or their consolidation."
Increase of a company's share capital
The capital increase can be carried out by issuing new shares or increasing the nominal value of the existing ones. It must always be agreed upon in a meeting or assembly. If you want to learn more about this topic, on our blog we have an article about how to increase the share capital of a company:
If you have a company and wish to process a reduction or increase of capital online, the procedure by videoconference is currently allowed to obtain your notarial authorisation. Additionally, it can be managed online along with other services such as the deed of incorporation, the appointment and dismissal of an administrator, the amendment of company bylaws, or the registration of corporate resolutions. This was permitted by Law 11/2023, on the digitalisation of notarial actions. If you want more information, please consult our online notary to learn about the commercial deeds you can process online.
Other questions related to the meaning of share capital in a company
As already mentioned, share capital is classified as a liability as it represents the resources contributed by the owners.
Share capital is classified as non-current liabilities since it belongs to the company and has no repayment term.
According to the type of contribution, we distinguish between monetary contributions and non-monetary contributions.
There are different types of contributions of tangible assets such as vehicles, real estate (whether premises, warehouses or offices), machinery, computers and printers.
It is also common to contribute tangible assets such as software patents or copyrighted goods, as well as contracts and credit rights. In general, the idea is that any asset with economic value and capable of being used to obtain profit for the company can be contributed.
Shares and stakes represent the share capital of companies. In Public Limited Companies, the shareholders are the holders of the shares, as the share capital is divided into them. In Limited Liability Companies, it is the stakes that represent part of the share capital.
If we talk about what the share capital of a company is, the possibility of spending this capital as such is a frequent question. However, the share capital is not a fund available for expenses as it represents the owners' resources, acting as a figure of liability. Nevertheless, it is capital that can be used to acquire assets such as machinery or facilities, that can be used to finance operations and even for the reinvestment of profits.
There is no maximum on the share capital contributed in companies, however there is a minimum capital, as we have mentioned previously.
It is the amount of money or assets declared by a company in its deed of incorporation. It specifies the initial investment of partners and shareholders to reflect the economic capacity of the company.
In relation to the share capital, the partners have the right to participate in the distribution of profits generated by the company, these being proportional to their percentage in the share capital as a general rule.
The right to attend the General Meetings is recognised by the Capital Companies Act, although the representation of shareholders therein will depend on the type of company. Thus, in Limited Companies, all shareholders have the right to attend, whereas in Public Limited Companies a minimum number of shares may be required for this.
To find out the share capital of a company, you can consult the company incorporation deed and the articles of association deed. It is also possible to consult the Mercantile Registry.
During the liquidation of a company, assets such as properties, machinery and other resources are sold and used to cover debts and obligations with suppliers, banks and employees. The remaining assets are distributed proportionally among the partners and shareholders according to their contribution to the share capital. This means that the investment may not be recovered depending on the economic situation of the company at the time of its liquidation.
JLA Notaries, Notary for businesses in Barcelona
In short, we hope to have made clear what the share capital of a company is, where it is found in the balance sheet, and how it is calculated. All that remains is to make the services of our Notaries in Barcelona available to all our readers. Get in touch with us if you want to set up a company! You can do so at our notary office, by email at bcn@jlanotarios.com or write to us via the contact form on the website.
