Share Capital Explained: A Solicitor’s Guide to Issued Capital, Nominal Value & Share Premium

Hello, I’m Malcolm Zoppi, a specialist corporate solicitor of England and Wales. When founding or investing in a UK limited company, the one concept that underpins everything—from ownership percentage to investor buy-in—is share capital.

In this comprehensive guide, I’ll break down the essential components of share capital under UK law, demystifying the jargon so you can structure your company with confidence.

Chapter 1: What is Share Capital?

Legally and financially, share capital represents the total nominal value of all the shares that a company has issued (created).

Let’s break that down with the classic “pizza” analogy:

• Think of your company’s total ownership as a pizza.

• You decide to divide this pizza (your company’s ownership) into a set number of slices (these are your shares). For example, 10 slices (shares).

• Under UK law, each share must be given a fixed, legal “par” or nominal value. This is an arbitrary value you set on day one, often very low, such as £1, 10p, or even £0.01 per share.

• If you set the nominal value at £1 per pizza slice (share) and you create 10 pizza slices, your company’s issued share capital is £10 (10 shares x £1 nominal value).

This £10 figure is the company’s legal share capital. It is not the market value of the company (which could be £1 million) and, crucially, it is often not the total price shareholders actually paid for their shares. (We’ll cover how that extra payment is handled in Chapter 3 under ‘Share Premium’).

This share capital figure is a core part of your company’s accounts and represents each shareholder’s stake in the business, granting them rights, which may include:

• Voting on major company decisions

• Receiving a portion of the profits (dividends)

• A right to the company’s assets if it’s wound up

When you register a company with Companies House, you must provide a ‘statement of capital’, which details this initial structure. This is a public document, as outlined in the Companies Act 2006, and it forms a core part of your company’s legal foundation.

Chapter 2: Types of Share Capital

Authorised Share Capital

Keyword Focus: Authorised share capital was a concept that applied to companies formed before the Companies Act 2006 came into full effect (October 2009).

It represented a ceiling—the maximum amount of share capital a company was legally allowed to issue, as stated in its constitutional documents. To issue more shares beyond this limit, the company had to pass a shareholder resolution to increase the authorised amount.

For modern companies (formed after 1 October 2009), the concept of authorised share capital no longer exists. This change was made to simplify corporate law. Unless your company’s articles of association specifically create a new cap, you have unlimited potential to issue new shares (subject to director and shareholder approvals).

Issued Share Capital

This is the most important figure. Issued share capital is the total nominal value of all the shares that the company has actually issued to its shareholders. The number of issued shares is recorded in the company’s share capital and share premium accounts, and any shares issued at a premium are accounted for separately. This would usually be recorded by your accountant.

If your company has issued 1,000 shares, and each has a nominal value of £1, your issued share capital is £1,000. This is the figure that appears on your balance sheet and your Companies House filings. It represents the shares that are currently in the hands of all shareholders, from founders to new investors.

Chapter 3: Nominal Value vs. Share Premium

This is where most new business owners get confused. The price a shareholder pays for a share is often split into two distinct parts: its “nominal value” and the “share premium.”

The nominal value (or ‘par value’), as we discussed in Chapter 1 above, is the fixed, legal minimum price of a share (also known as the face value of a share). This nominal value is often an arbitrary figure chosen at incorporation and may not reflect the actual market value of the shares.

The share premium is the amount paid by shareholders above the nominal value. In practice, the market value of a share is usually higher than its nominal value.

Nominal Value

The nominal value (or ‘par value’) is the fixed, legal minimum price of a share. It’s an arbitrary value you set when you first form the company.

For most UK startups, this is a very small amount, such as £1, 10p, or even £0.01 per share.

Example: You start a company and decide to issue 100 shares to yourself, the founder. You set the nominal value at £1 per share.

• Total Issued Share Capital: 100 shares x £1 = £100.

• This £100 is the minimum amount the company must receive for those shares.

The total nominal value of your shares is important, as a shareholder’s liability is typically limited to the amount unpaid on their shares (if any).

Share Premium

Now, fast-forward two years. Your company is successful and a new investor wants to buy in. Your company is now worth £100,000.

The investor wants to buy 100 new shares to get a stake in the business. Would you sell them a share for its nominal value of £1? Of course not. You would sell it for its market value. Selling shares at a premium allows the company to raise additional funds beyond the nominal value. When a company offers shares for sale at a price above their nominal value, the excess is credited to the share premium account.

This is where share premium comes in.

Keyword Focus: A share premium is the difference between the price a share is issued for and its nominal value.

Let’s continue the example:

• The investor agrees to pay £1,000 for each new share (its market value).

• The nominal value is still £1.

• The share premium is £999 (£1,000 issue price – £1 nominal value).

When the company receives the money, it’s recorded in two separate places on the balance sheet:

• £1 goes into the “Share Capital” account.

• £999 goes into a “Share Premium Account.”

This is a strict accounting rule. The money in the share premium account is a non-distributable reserve, meaning it can’t just be paid out as a dividend. It’s protected capital, which adds to the company’s financial strength.

Key Share Value Concepts: A Comparison

To make this clear, here is a simple table contrasting these key terms:

Stock is another term for shares and represents ownership in a company. When a company issues new shares or stock, it can raise a fund to support business activities such as expansion, investment, or debt repayment.

Paid Up Share Capital

Finally, we have paid up share capital. This term simply describes how much of the nominal value has actually been paid by the shareholder to the company.

• Fully Paid Up: The shareholder has paid the full nominal value (this is also referred to as full payment for the shares). In our example, the founder paid their £100 for the first 100 shares. Those shares are “fully paid.”

• Partly Paid: The company agrees to let the shareholder pay later. If a shareholder subscribed for 100 shares at £1 nominal value but has only paid £20, their shares are “partly paid.” The company can “call” on them for the remaining £80 at any time.

When you register your company with Companies House, you must state whether the shares are paid or unpaid.

Shareholder Implications and Rights

When a company issues shares, the implications for shareholders go far beyond simply increasing the number of shares in circulation. Understanding these implications is essential for both private companies and their investors, as the structure of a company’s share capital directly affects ownership, control, and the company’s financial foundation.

The nominal value (or par value) of shares, as set out in the company’s constitutional documents, determines the minimum price at which shares can be issued. For companies with an authorised share capital (typically those incorporated before the Companies Act 2006), it’s crucial not to exceed the maximum amount specified without first getting shareholder consent (usually via a special resolution). For most modern companies, this restriction no longer applies, but the principles of company law and the Companies Act 2006 still govern how shares are issued and recorded.

When new shares are issued, the company’s balance sheet must accurately reflect the changes in issued share capital, paid up capital, and the share premium account. The paid up share capital represents the total nominal value that shareholders have actually paid, while any amount paid above the nominal value is credited to the share premium account. This distinction is important for both accounting and legal compliance, as it affects the company’s ability to pay dividends and its overall financial health.

Shareholders’ rights are closely tied to the type and class of shares they hold. Ordinary shares typically carry voting rights and entitle holders to receive dividends and participate in the distribution of assets if the company is wound up. Preference shares may offer priority in dividend payments or asset distribution, but often come with limited or no voting rights. The monetary value and market value of shares can fluctuate, impacting both the value of shares held by investors and the company’s perceived worth.

A key concern for existing shareholders is the potential dilution of their controlling interest when the company decides to issue new shares. To address this, companies may issue shares with different rights—such as non-voting shares or shares with restricted dividend entitlement—allowing them to raise capital without significantly altering the balance of power. The company’s articles of association and any shareholders’ agreements play a vital role in setting out these rights and restrictions, ensuring clarity and protecting the interests of all parties.

Issuing new shares is not just a financial decision; it’s a legal process that requires careful adherence to company law and the Companies Act 2006. Companies must obtain the necessary shareholder resolutions, update their constitutional documents, and ensure that all changes are properly recorded. Failure to follow these procedures can lead to disputes, regulatory penalties, and challenges to the validity of the share issue.

For further details on the implications of issuing shares and the rights of shareholders, it’s advisable to consult with legal and financial experts. Understanding the interplay between authorised share capital, issued share capital, paid up capital, and the various rights attached to different share classes is essential for maintaining compliance, protecting shareholder interests, and building a robust financial foundation for your business. By prioritising transparency and following best practices, companies can foster trust with their shareholders and position themselves for sustainable growth.

Final Thoughts: Why This Matters

Understanding your share capital is not just an accounting exercise. It is fundamental to running your business.

It dictates ownership, controls how you bring in investors, and forms the basis of your company’s legal structure, which is defined in your Articles of Association. Understanding your share capital is essential for securing funding, raising money for business growth, and maintaining a healthy equity structure. Accurate reporting of share capital on the company’s balance sheet is crucial for compliance and financial transparency.

These structures are often managed by a Shareholders’ Agreement, which governs the relationship between the people who become shareholders.

Setting up your issued share capital, nominal value, and handling share premium correctly is a complex legal task. If you’re structuring a new company or preparing for an investment round, it’s vital to get expert advice.

If you need guidance on structuring your company’s share capital or drafting the necessary legal documents, please feel free to get in touch with me, Malcolm Zoppi, as your specialist corporate lawyer for a no-obligation discussion.