Share capital refers to the amount of money that a company raises from its shareholders by issuing shares in return for cash or other considerations. It represents the funding a company has received from shareholders who have purchased its shares. The key aspects of share capital include:
- Authorized Capital: The maximum amount of share capital that a company is allowed to issue, as specified in its articles of incorporation.
- Issued Capital: Part of the authorized capital that has actually been issued to shareholders.
- Paid-up Capital: The amount of issued capital that shareholders have fully paid for.
- Common Shares (Ordinary Shares): These shares usually carry voting rights and reflect ownership in a company. Holders of common shares typically benefit from dividends and have residual rights to the company’s assets in the event of liquidation.
- Preferred Shares: These shares often come with predetermined dividend rates and have priority over common shares in terms of dividend payments and during liquidation. However, they might not carry voting rights.
- It provides the primary source of funding for a company.
- It determines the ownership structure—how much of the company each shareholder owns based on the proportion of total issued shares they hold.
- It can influence the control dynamics of the company, as shareholders typically have voting rights in major company decisions.
Share capital is crucial not only for the initial financing of a company but also as a means for ongoing capital management and strategic financial planning.
Calculation of Equity
Equity is the total number of shares of a company, which is part of the company’s owner’s equity. The calculation method of equity is usually calculated by the issue price and the number of shares issued. For example, if a company issues 1 million shares of stock at a price of $10 per share, then its equity is 1 million shares multiplied by $10, or $10 million.
The reason why equity plays an important role in financing and strategic planning is that it directly affects the company’s market value and shareholders’ equity. First, the size of equity will affect the company’s financing ability in the capital market, and a larger equity size will usually make it easier for the company to obtain more financial support. Secondly, changes in equity are closely related to the company’s strategic planning, such as expanding business by issuing new shares and increasing shareholder value by repurchasing shares.
In addition to equity, concepts such as rate of return are also closely related to equity. Rate of return is one of the important indicators that investors care about, and it reflects the rate of return on investment. Changes in equity will directly affect the company’s profitability and shareholder returns, thereby affecting the rate of return on stock. Therefore, when investors make stock investments or companies make financing plans and strategic plans, they need to fully consider the impact of equity capital.
Is it necessary to have paid-up capital when establishing a company in Australia?
In Australia, when setting up a company, there is no specific minimum registered capital requirement. You can register a company with a very low share capital, even as little as one share at one dollar. The focus is more on meeting the legal and procedural requirements set out in the Corporations Act 2001, such as having at least one shareholder and one director (who must reside in Australia if the company is an Australian proprietary limited company), rather than on the amount of initial capital. This flexibility allows for a wide range of businesses, from small startups to large corporations, to be incorporated according to their specific needs and capabilities.
Determining the appropriate amount of share capital for setting up a company in Australia depends on several factors specific to the business and its goals. Here’s a structured approach to help decide how much share capital might be appropriate:
1. Risk Management:
- Financial Cushion: Determine a financial buffer to help manage risks and uncertainties in the business environment.
2. Investor Considerations:
- Attractiveness to Investors: If you plan to seek external investors, the amount of share capital should be appealing enough to attract investment but also realistic in terms of company valuation.
- Ownership Structure: Decide how much ownership you are willing to give up initially. This will influence how much capital you seek from investors versus what you might contribute as the founder.
3. Legal and Regulatory Considerations:
While there is no minimum required by law in Australia, setting a practical and justifiable amount based on the business plan and market conditions is crucial.
4. Professional Advice:
Talk to MNY accountants to get an accurate estimate of your capital needs and structuring your capital in a way that optimizes tax and legal standings.
For many small businesses, starting with a modest amount of share capital, often as little as a few thousand dollars, is common. This can be increased as the business grows and requires more funding. For larger ventures or those requiring significant upfront investment (like manufacturing or tech startups), the initial share capital may be substantially higher, often in the tens or hundreds of thousands of dollars.
Ben Gu is a Chartered accountant, registered tax agent, registered ASIC agent, SPAA specialist advisor and CA SMSF specialist with experience across a wide range of tax and business.
