In this guide we will explore the wide range of share capital advantages and disadvantages. Is raising share capital right for your business?

Share capital can mean slightly different things to different people in different contexts. Accountants, for example, have a slightly more specific definition of ‘share capital’ than City traders. 

But we can broadly describe ‘share capital’ as the total value of shares a limited company can raise by selling common or preferred stocks.

When you’re the only shareholder, you own 100% of the company. But if you decide to issue shares, for most companies there is no limit to the number you can issue. 

There are some exceptions to take note of though – for example, your articles of association may specify a limit.

In this article we will run through what you need to know about share capital for limited companies. We’ll then debate the advantages and disadvantages of share capital so you can weigh up the pros and cons.

Share capital types

There are a few important types of share capital to understand, including:

  • Authorised share capital: The maximum amount of share capital a company is allowed to issue, as specified in its constitutional documents.
  • Issued share capital: The portion of authorised share capital that has actually been issued to shareholders.
  • Paid-up share capital: The amount of money shareholders have paid for their shares.

The share capital appears as a liability on the company’s balance sheet, under the shareholders’ equity section.

Advantages of share capital

The advantages of share capital can include:

  • No repayment requirement: Compared to credit financing e.g. bank loans, there are no regular loan instalments to pay or interest to incur.
  • Better creditworthiness for your business: Share capital is reassuring to both creditors and customers in terms of financial security
  • Better fiscal flexibility: In contrast, credit financing often has restrictions around how the business can use a loan. There is also the possibility to raise more money through another share capital round in the future.
  • Diminished risk of bankruptcy: There is arguably less risk of insolvency or failing to repay debts to creditors.

In short, share capital has a strategic dimension, too.

It avoids the drawbacks – for example, interest payments and long-term payback commitments – of borrowing, yet can deliver crucial capital. For more details, read our guide – what is debt finance?

Share capital puts investor commitment to good use, and can also boost your business’s financial reputation.

Disadvantages of share capital

Potential disadvantages include:

  • Less control: Issuing shares means the company founders are giving up some control and a proportion of ownership. A combination of shareholders with over 50% of voting rights could make changes to how the company is run, for example.
  • Share dilution: When your company issues more shares, the percentage ownership for your shareholders decreases – this can reduce the interest shareholders have in your company.
  • Public disclosure: If your business exercises share capital, you may need to share more financial information publicly by disclosing it to Companies House
  • Not tax deductible: In contrast, companies can lower their tax bill via the interest paid on debt owned to a lender

There is also the possibility that if the nominal value of shares goes up in the future, shareholders’ limited liability increases accordingly. This is more of a risk in the event that the company becomes insolvent in the future.

Final thoughts: Share capital advantages and disadvantages

Weigh up the different share capital advantages and disadvantages before proceeding to raise money.

The disadvantages of share capital will outweigh share capital advantages for some but for many businesses, it’s a great strategic option. 

Share capital advantages and disadvantages for you will depend on the size and nature of your business and other, complex, ongoing considerations.

Ask for advice about share capital advantages and disadvantages before you use this method to raise funds.

For other informative guides, take a look at our blog. Recently we explored annual accounts in detail – what they are and how to prepare them.

The team at Accountants East London have over 30 years of experience and no matter your accountancy needs or business type, they can help.

Please feel free to get in touch to request our guidance on share capital, or any other aspect of accountancy. We look forward to hearing from you.