The sale of shares is a common way for companies to raise capital and expand their business operations. Companies can issue different types of shares, each with its own characteristics and benefits.
What is Share Capital in Accounting?
Share capital refers to the amount of money a company raises from selling its shares to investors. It represents the total amount of capital a company has generated from selling shares to investors. Share capital is a long-term source of finance for a company and is considered a permanent part of a company’s capital structure.
The sale of shares is a common way for companies to raise capital and expand their business operations. Companies can issue different types of shares, each with its own characteristics and benefits. Some of the most common types of shares include common shares, preferred shares, and stock options.
Types of Shares in Company Law
Common Shares
Common shares are the most common type of shares and represent ownership in a company. Common shareholders have voting rights, allowing them to participate in important company decisions such as the election of directors and the approval of major transactions. Common shareholders are entitled to receive dividends, but these are not guaranteed and are dependent on the company’s financial performance.
Preferred Shares
Preferred shares are a type of share capital that provides a guaranteed return to shareholders through dividends. Preferred shareholders have priority over common shareholders in the distribution of dividends and the repayment of capital in the event of liquidation. However, preferred shareholders do not have voting rights and do not have a say in the company’s management.
Stock Options
Stock options are a type of share capital that gives employees the option to purchase shares in the company at a predetermined price. Stock options are often used as a form of compensation for employees and are a way for companies to attract and retain top talent.
Share Capital on the Balance Sheet
Share capital is recorded on a company’s balance sheet as liability and equity. The liability portion represents the share capital the company has issued and is owed to shareholders. The equity portion represents the portion of the company’s assets that shareholders own.
When a company issues shares, the share capital liability is increased, and the equity is also increased. This increase in equity represents the ownership interest of the shareholders in the company.
To increase the authorised share capital, a company must follow a specific set of steps, which vary depending on the laws of the jurisdiction in which the company is incorporated. However, here are some general steps that are typically involved in increasing authorised share capital:
- Review the company’s articles of incorporation or equivalent document to determine the current authorised share capital and the procedure for increasing it.
- Prepare and approve a resolution by the board of directors to increase the authorised share capital.
- Hold a shareholders’ meeting to approve the increase in authorised share capital. A vote of at least a majority of the outstanding shares, or a higher percentage specified in the company’s articles of incorporation, is required for approval.
- File the necessary documents with the relevant government authority, such as the Registrar of Companies, to register the increase in authorised share capital.
- Update the company’s books and records to reflect the increased authorised share capital.
It is important to note that increasing authorised share capital does not necessarily mean a company must issue new shares. Authorized share capital is the maximum number of shares a company can issue. Companies can choose to issue less than the maximum number of shares authorized.
Additionally, increasing authorised share capital may have tax and legal implications, and it is advisable to seek professional advice before proceeding.
Conclusion
Share capital is an important aspect of a company’s financial structure and a crucial accounting component. Understanding the different types of share capital and how it is reflected on a company’s balance sheet is essential for investors and stakeholders to make informed decisions about its financial health and performance. Whether you are an investor or a business owner, it is important to stay informed about the latest share capital and accounting developments to make informed decisions about your financial future.
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