Understanding Share Capital for Limited Companies
The share capital of a company is used to raise finance, determine the extent of ownership, rights and obligations of the shareholders, and for transferring the ownership between different parties. When incorporating your company in Ireland, you need to decide on the amount of share capital for your company. A company’s registration application (Form A1) and the accompanying Constitution must state the amounts of its share capital.
When it comes to deciding on the share capital amounts, the two most common terms that the new business owners come across are Authorised Share Capital and Issued Share Capital. Now let us explain what these two types of share capital mean.
What are the Authorised and Issued Share Capital?
Authorised Share Capital
The authorised share capital of a company is the maximum amount of the share capital mentioned in its Constitution (Articles of Association), that it can issue to the shareholders.
- A company cannot issue shares to its shareholders beyond the amount of the Authorised share capital. The Authorised share capital provides a limit to the amount of capital that a company can issue. However, this can be increased by the members’ approval later on.
- Most companies are registered with Authorised capital that is in excess of their initial financing requirements, and therefore, most of the share capital remains unissued/unused by the company’s management.
- It enables the company to issue additional shares when the circumstances, such as business growth, necessitate the need to raise capital at a later stage.
- All companies should have an Authorised share capital except a Private Company limited by shares, which can opt not to have an Authorised share capital. However, it must have an I-issued share capital.
Issued Share Capital
Issued share capital is the proportion of the authorised share capital issued to the shareholders to raise finance for the business.
- A company can issue as many shares out of the Authorized share capital as it would require by selling its shares.
- Each shareholder is issued a Share Certificate which is the documentary evidence of the shares owned by them, representing their investment in the company.
- A company can issue new shares to raise finance whenever needed.
- Issued shares can be transferred from one shareholder to another.
- Since the underlying concept of a limited company is its owners’ limited liability, the shareholders’ obligation is restricted only to the extent of any value unpaid on the shares they hold.
Some of the Commonly Asked Questions Regarding Share Capital
Can the authorised share capital be changed?
Yes, a company can increase or reduce its Authorised share capital. This is done by changing the Constitution document, with the shareholders’ approval.
Are the alterations to share capital notified to the Companies Registration Office (CRO)?
Any change made to the share capital, whether to divide, consolidate, convert, cancel, or redeem any shares, must be notified to the CRO within one month of such change. The notice is filed to the CRO on Form B7. Where the issued share capital is increased, it must be notified to the CRO by filing Form B5. This form should be filed within one month of the date of the allotment of shares.
Can there be different classes of shares issued?
A company can issue shares of different classes carrying varying rights and interests. Different classes of shares can be used to determine the different voting rights of the shareholders.
What could be the examples of situations where new shares may be issued?
Additional shares can be issued in situations like succession planning, introducing new ventures and investors, altering the rights associated with different shares, creating a group structure, etc. It is a good way to raise finance for the company while avoiding obtaining loans to finance future projects.
Suggested Amounts of Authorised and Issued Share Capital
The above are the commonly recommended amounts of authorised and issued share capitals. Where you anticipate that the company might need to secure a larger amount of investment, an authorised share capital of €1,000,000 divided into 1,000,000 shares of €1 each is better. This will give you a flexible margin to cater for any future expansion and without the need for approval to increase the authorised share capital and then notifying the change to the CRO.
Have More Questions About Structuring Your Share Capital?
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