Summary
- Share capital represents the total nominal value of issued shares and must be maintained as permanent capital under the Companies Act 2006, while share premium is the excess paid above that nominal value and sits in a separate account.
- Share premium cannot be used to pay dividends, but may be applied to issue bonus shares or write off share issue expenses.
- Issuing new shares dilutes existing shareholders’ ownership, affecting both voting rights and dividend entitlements proportionally.
- This article is a guide to share capital and share premium for Australian business owners, covering the legal distinctions and practical implications under Australian corporate law.
- This article has been produced by LegalVision, a commercial law firm that specialises in advising clients on corporate law and business structuring.
Tips for Businesses
Review your Articles of Association to confirm how shares are structured before issuing new shares. Record share premium in a separate account and apply it only for permitted purposes. When raising capital, consider the dilution impact on existing shareholders’ voting rights and dividends.
As a business owner, understanding the nuances of your company’s financial structure is crucial. Two key components that are often confused are share capital and share premium. This article will explore the legal differences between the two, their roles in your company’s financial landscape, and the implications for you as a business owner or investor.
Defining Share Capital and Share Premium
Your share capital is the total nominal value of all shares your company has issued. In simple terms, it is the base amount your shareholders contribute in exchange for ownership. The nominal value is the minimum price at which you can issue shares under your Articles of Association, the Companies Act 2006, and other corporate governance documents. You cannot issue shares below this value.
Your share premium is the excess amount that incoming shareholders, such as investors, pay for shares above their nominal value; in other words, the difference between the issue price and the nominal value. You record this additional amount in a separate share premium account.
A share premium often reflects the market value of your shares and demonstrates investor confidence in your company. In practice, it gives your company extra funds beyond the nominal value of your shares, which you can use to support growth and development.
Legal Status and Treatment
Your share capital is regulated by the Companies Act 2006. You must maintain it as permanent capital and can only reduce it through specific legal procedures. This is because the requirement exists to protect your creditors by ensuring your company maintains a minimum level of assets.
Continue reading this article below the formCall 0808 196 8584 for urgent assistance.
Otherwise, complete this form, and we will contact you within one business day.
Accounting Treatment and Financial Reporting
Your share capital appears on your balance sheet under shareholders’ equity and remains constant unless you issue new shares or reduce your capital. In addition, you must report any changes to your share capital to Companies House.
Your share premium is recorded separately in the share premium account but, like your share capital, also appears under shareholders’ equity on your balance sheet. However, you can use your share premium for specific purposes, such as issuing bonus shares or writing off share issue expenses.
Implications for Companies
Not all shares carry voting rights; for example, you can issue shares to an investor with solely the right to dividends and capital distribution. As a result, the more share capital a shareholder holds (provided their shares carry voting rights), the greater their power and control in your company. Your share capital also impacts your financial ratios and creditworthiness.
Your share premium provides additional funds and enhances your company’s financial position. Having a share premium demonstrates market confidence in your company’s value, allowing you to use it strategically for future growth initiatives. However, when you issue further shares, this dilutes your existing shareholders, affecting both their voting rights and dividends.
Investor Considerations
Your share capital indicates the minimum value of your shares, which investors use to assess your company’s initial capitalisation and as a baseline for evaluating share price movements.
Your share premium reflects your company’s perceived value beyond its nominal share value, indicating market demand for and the actual market value of your shares. The presence and size of your share premium can impact potential returns on investment.
Raising equity for your startup? Download this free toolkit to access essential resources, including a Pro Forma Capitalisation Table and Equity Term Sheet, to manage your startup’s equity with ease.
Key Takeaways:
- Your share capital represents the total nominal value of your issued shares, while your share premium is the amount paid above this nominal value.
- Your share capital is subject to strict legal regulations, and you must maintain it as permanent capital, whereas your share premium has more flexible uses, but you cannot distribute it as dividends.
- Your share capital determines ownership and voting rights, while your share premium provides additional funds.
- As an investor, understanding the relationship between share capital and share premium can give you insights into a company’s valuation and market perception.
In summary, while share capital and share premium are related concepts, they carry distinct legal and financial implications for your company and your investors. By understanding these differences, you can make more informed decisions about your company’s finances, investment strategies, and corporate structuring.
LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced corporate lawyers help businesses with share structures, capital raising, ongoing company governance, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Yes, a company can reduce its share capital through specific legal procedures, such as a court-approved capital reduction or a solvency statement process.
A share premium account records the excess amount investors pay for shares above their nominal value. Companies can use it to issue bonus shares or write off share issue expenses.
No, companies cannot use share premium to pay dividends. However, they can use it for specific purposes, such as issuing bonus shares or offsetting share issue expenses.
Issuing new shares dilutes existing shareholders’ ownership, reducing both their voting rights and dividend entitlements proportionally.
We appreciate your feedback! Request your free consultation now.
