When setting up a limited company in the UK, one of the key terms you will encounter is share capital. Whether you are incorporating a new company or managing an existing business, understanding what is share capital helps you make informed decisions about ownership, funding, and financial reporting.
Share capital represents the money a company raises by issuing shares to shareholders. It reflects the nominal value of the shares issued by a company and forms part of the shareholders’ equity shown on the company’s balance sheet.
For many business owners, terms such as issued share capital, paid-up share capital, ordinary shares, and share premium can seem complicated. However, understanding these concepts is essential for managing a UK limited company correctly.
What Is Share Capital?
Share capital is the total nominal value of shares that a company has issued to its shareholders. It represents the funds invested into the business through the sale of company shares.
Unlike a business loan, share capital does not need to be repaid to shareholders. Instead, shareholders become part owners of the company and receive certain rights depending on the type and number of shares they hold.
For example:
- A company issues 1,000 ordinary shares.
- Each share has a nominal value of £1.
- The company’s share capital is £1,000.
The amount recorded as share capital is based on the nominal value of shares rather than their current market value.
How Does Share Capital Work in a Limited Company?
When a company is incorporated in the UK, it creates shares that represent ownership of the business. These shares are allocated to shareholders, who invest money into the company.
The number of shares owned determines:
- The percentage of ownership in the company
- Voting rights on company decisions
- Entitlement to dividends
- The level of control shareholders have
For example, if a company has 100 shares and one shareholder owns all 100 shares, that person owns 100% of the company.
A company can issue additional shares in the future to raise more funds, although this may reduce the ownership percentage of existing shareholders through share dilution.
Share Capital Meaning: Understanding Nominal Value and Market Value
Many people confuse share capital with the value of company shares. However, these are different concepts.
Nominal Value of Shares
The nominal value (also called the face value or par value) is the fixed value assigned to each share when it is created.
For example:
- A company issues 500 shares.
- Each share has a nominal value of £1.
- The total share capital is £500.
The nominal value remains fixed and is recorded in the company’s financial statements.
Market Value of Shares
The market value is the actual price investors are willing to pay for shares based on factors such as:
- Company performance
- Profitability
- Future growth potential
- Market conditions
If investors pay more than the nominal value, the additional amount is recorded as a share premium rather than share capital.
Types of Share Capital in the UK
There are several types of share capital that companies may use depending on their structure and funding requirements.
Issued Share Capital
Issued share capital refers to the total value of shares that a company has issued to shareholders.
For example, if a company is authorised to issue 10,000 shares but has only issued 2,000 shares, the issued share capital is based on those 2,000 shares.
This represents the actual ownership interest held by shareholders.
Paid-Up Share Capital
Paid-up share capital is the amount shareholders have actually paid for their shares.
For example, if a shareholder agrees to buy 1,000 shares at £1 each but has only paid £500, the company has £500 in paid-up share capital.
Called-Up Share Capital
Called-up share capital is the amount a company has requested shareholders to pay for their shares.
The company may not always require shareholders to pay the full amount immediately.
Authorised Share Capital
Authorised share capital traditionally referred to the maximum amount of shares a company could issue.
However, under the Companies Act 2006, UK companies are no longer required to state an authorised share capital limit. Many companies still specify their intended share structure internally.
Ordinary Shares and Preference Shares
Companies can create different classes of shares, each with different rights.
Ordinary Shares
Ordinary shares are the most common type of company shares. They usually provide shareholders with:
- Voting rights
- Rights to receive dividends
- Ownership interest in the company
Most small and medium-sized UK companies issue ordinary shares when they incorporate.
Preference Shares
Preference shares usually provide shareholders with priority when receiving dividends or repayment during company liquidation.
They may have limited or no voting rights compared with ordinary shares.
The rights attached to each share class are usually explained in the company’s articles of association.
Why Do Companies Use Share Capital?
Share capital is an important source of funding for businesses, especially when companies want to grow without relying entirely on borrowing.
Advantages of Share Capital
Some benefits include:
Raising business funds
Companies can raise money from investors to support expansion, purchase assets, or finance operations.
No regular repayment obligations
Unlike loans, share capital does not require fixed repayments or interest payments.
Improved financial stability
A strong share capital structure can improve confidence among investors, suppliers, and lenders.
Limited liability protection
Shareholders are generally only responsible for the amount unpaid on their shares. Their personal assets are usually protected if the company experiences financial difficulties.
Disadvantages of Share Capital
Although share capital provides funding opportunities, businesses should also consider potential disadvantages.
Reduced Ownership Control
Issuing more shares can reduce the percentage ownership of existing shareholders. New investors may also gain voting influence over company decisions.
Share Dilution
When additional shares are issued, existing shareholders may own a smaller proportion of the company.
Additional Reporting Requirements
Companies must maintain accurate share records and report certain changes to Companies House.
Is Share Capital an Asset or Liability?
A common question is: is share capital an asset?
Share capital is not treated as a business asset. Instead, it appears within the shareholders’ equity section of the company balance sheet.
The money received from issuing shares may become an asset, such as cash in the company bank account. However, the share capital itself represents the owners’ investment in the company.
Share Capital vs Shareholders’ Equity
Share capital and shareholders’ equity are closely related but not identical.
Share capital refers specifically to the nominal value of shares issued by the company.
Shareholders’ equity includes:
- Share capital
- Share premium accounts
- Retained profits
- Other reserves
Together, these figures show the financial interest shareholders have in the company.
How Is Share Capital Recorded?
When a company issues shares, the transaction is recorded in its accounting records.
For example:
A company issues 5,000 shares at a nominal value of £1 each.
The accounting entry would show:
- Share capital: £5,000
If investors pay £3 per share:
- Share capital: £5,000
- Share premium: £10,000
The additional £2 per share is recorded separately as share premium.
Share Capital and Company Formation in the UK
During company formation, shareholders decide:
- Number of shares issued
- Share value
- Share classes
- Ownership percentages
A typical UK private limited company may start with one shareholder holding one ordinary share, although companies can create more complex structures depending on their needs.
Correctly setting up share capital from the beginning helps avoid future complications with ownership changes, investment, and company restructuring.
How CruseBurke Can Help With Share Capital and Company Accounting
At CruseBurke, we help UK businesses understand company structures, accounting requirements, and financial decisions with professional guidance tailored to their circumstances. Our experienced accountants support limited companies with company formation, share structures, bookkeeping, tax planning, and ongoing compliance. Whether you are starting a new business or reviewing your existing company setup, our team can help you manage your accounting responsibilities efficiently and make informed decisions for future growth.
Final Thoughts
Understanding what is share capital is essential for anyone running or forming a UK limited company. Share capital defines ownership, supports business funding, and plays an important role in company accounting records.
By understanding concepts such as issued share capital, paid-up share capital, nominal value, share premium, and different share classes, business owners can create a stronger foundation for managing their company finances.
If you are unsure about your company’s share structure or accounting obligations, seeking professional advice can help ensure your business remains compliant and financially organised.
Disclaimer: This blog provides basic information on shares, share value, and share capital.
