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.

Summary: Share capital (UK)

  • Share capital is money raised by issuing shares in a company and it can be a useful way to fund growth without taking on debt.
  • Its main advantages are no loan repayments, no interest costs, more funding flexibility, and potentially stronger financial credibility.
  • Its main disadvantages are diluted ownership and voting power, less control for founders, public filing obligations, and the fact that dividends are not tax-deductible.
  • As per UK company terms, nominal value is the set legal value of a share, market value is what investors will actually pay and a Statement of Capital records the company’s share structure and rights.
  • Share capital can be changed after incorporation by issuing new shares, ordinary shares usually carry voting rights, preference shares often prioritise dividends, and share capital is not the same as a director’s loan.

Share capital types

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

  • 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.
  • Authorised share capital: The maximum amount of share capital a company is allowed to issue, as specified in its constitutional documents. However, authorised share capital is generally not used in modern UK private company practice unless it is specifically included in the company’s articles.

Share capital appears in the shareholders’ equity section of the balance sheet.

Advantages of share capital

The advantages of share capital can include:

  • No repayment requirement: Compared to debt financing, share capital does not require regular loan repayments or interest payments.
  • Better creditworthiness for your business: Share capital can strengthen a company’s capital base and may improve how lenders and other stakeholders view its financial position.
  • Better fiscal flexibility: Share capital can give a company flexibility to raise further equity later, subject to its articles and company law requirements.
  • Diminished risk of bankruptcy: Because share capital is not repayable in the same way as debt, it may reduce refinancing pressure and repayment risk.

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 can dilute ownership and voting power, and shareholders with sufficient voting rights may influence company decisions.
  • Share dilution: When a company issues more shares, existing shareholders’ percentage ownership can fall, which may dilute their economic and voting interest.
  • Public disclosure: Businesses must report changes to share structure to Companies House, and some of that information becomes publicly available on the register.
  • Not tax deductible: Dividends paid to shareholders are not tax-deductible in the same way as interest on borrowing may be.

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.

FAQs: Share capital

What is the difference between nominal value and market value?

Nominal value is the fixed value assigned to a share when it is created, often referred to as the par value, such as £1 per share. It is the amount used for legal and accounting purposes and helps determine a shareholder’s liability.

Market value is the price someone is actually willing to pay for the share, which can rise or fall depending on the company’s performance and wider market conditions.

What is a Statement of Capital?

A Statement of Capital is a document companies must provide when incorporating or filing certain changes with Companies House in the UK.

It shows the total number of shares issued, their aggregate nominal value, the different share classes and their rights and how much of the share capital has been paid up or remains unpaid.

Can share capital be changed after incorporation?

Yes. A company can issue new shares after incorporation to raise funds, support growth, or bring in new investors.

In the UK, this usually involves the appropriate company approvals and filing form SH01 with Companies House.

What are the main types of shares?

Ordinary shares are the most common type of share. They usually carry voting rights and may pay dividends when the company makes profits.

Preference shares usually give the holder priority over ordinary shareholders for dividends, but they often carry limited or no voting rights.

Is share capital the same as a director’s loan?

Share capital is money invested into the company in exchange for ownership, while a director’s loan is money borrowed by or lent to the company that must normally be repaid.

Where can I find official guidance?

For official compliance guidance on company shares, see the Companies House guidance on share structure.

Final thoughts: Share capital advantages and disadvantages

Take a look at our popular articles for further reading, including:

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.