Share capital explained: authorised vs issued capital, nominal value and share premium

Share capital is one of those terms that every company owner uses and surprisingly few can define. The short answer: share capital is the total nominal value of all the shares your company has created, and it has nothing to do with what your company is worth. If you plan to sell your company or raise investment, you need to understand share capital, the difference between authorised and issued share capital, and the gap between nominal value and share premium. Getting these wrong in front of a buyer or an investor makes you look like you do not know what you are offering, and that can jeopardise the deal.

What is share capital?

Share capital is the total nominal value of all the shares in your company that the company has created.

Think of your company as a pizza. You slice it into, say, 16 slices. Each slice is a share, and each share has a fixed legal value, which we call the nominal value. Let's say it is £1 per slice. Put all the slices together and you have the company's share capital: in this case, £16.

This is very different from market value. Your company could be worth millions of pounds while its share capital has stayed the same since the day it was incorporated. The two numbers measure different things. Share capital is a legal figure fixed when the shares are created. Market value is what someone would pay for the business today. I come back to why they diverge when I cover nominal value and share premium below.

Types of share capital: authorised share capital

There are two main types of share capital you need to know about. The first is authorised share capital.

Authorised share capital is an older concept. It applies to companies incorporated before October 2009 and it was the maximum number of shares a company could create according to its articles of association. Modern companies formed after October 2009 do not have this limit any more.

If your company was formed before then and the limit is still sitting in your articles of association, it still binds you. So if you want to create more share capital than your articles allow, you will need to amend your articles first. This comes up more often than you would think with older companies that are raising investment for the first time.

What is issued share capital?

The second type is issued share capital, and this is the one that matters most. Issued share capital is the total nominal value of all the shares that have actually been created, or issued, by the company.

For example, if you have issued 100 shares at £1 per share, the issued share capital is £100. One hundred shares multiplied by £1.

To see the difference between authorised and issued share capital, think of an all-you-can-eat sushi restaurant. In theory you are authorised to eat as much sushi as you like. That is your authorised share capital. The issued share capital is the amount of sushi you have actually eaten. One is a ceiling; the other is what has really happened.

Nominal value vs share premium

This is where people get confused, so let me simplify it.

The nominal value is a fixed legal minimum price per share. It is the minimum a shareholder must pay to the company to hold that share. In reality it is a made-up concept, a legal figure rather than an economic one, but it has real consequences.

A shareholder typically pays the nominal value on incorporation. If they do not pay it at that point, the share is treated as unpaid and the money will need to be paid when the time comes. In practice that usually means one of two things: the shareholder pays it when the company asks, or, if the company becomes insolvent, the shareholder who still owes that money must pay it to the company so that it can be used to pay off creditors.

The nominal value is typically £1 per share. It can also be much lower, for example 1p per share.

Anything paid above the nominal value is recognised as share premium. It is the mark-up paid over the base minimum. So if an investor pays £1,000 for a share with a nominal value of £1, then £1 is share capital and £999 is share premium. That is why a company can raise significant sums from investors while its share capital barely moves.

Limited liability and the nominal value of shares

To make sense of why the distinction between nominal value and share premium exists, you first need to understand why your company is called a limited company, an "Ltd".

Your company is limited because the shareholders' liability is limited to the nominal value of their shares. If you set up a new company today and subscribe for 100 shares with a nominal value of £1 each, your liability is capped at £100. That is the case even if the company goes on to owe £10,000 to a supplier. The supplier's claim is against the company, not against you, and the most you can be required to put in is the nominal value you agreed to pay for your shares.

There is one important assumption in that example: that you have not given any personal guarantees. A personal guarantee sits outside the company and is a separate promise to the creditor. Limited liability does not protect you from a guarantee you have signed.

So limited companies and nominal values work hand in hand. The nominal value caps your liability towards third parties outside the company, and that cap is what we mean by limited liability.

The reason the law works this way is deliberate. Businesses are good for the economy, so the government wants to encourage people to start them. Starting a business is risky, and to encourage people to take that risk the concept of the limited company was introduced. It limits the liability of the founding shareholders and gives them certainty over how much they stand to lose if things go wrong. Without it, far fewer people would set up companies.

Why this matters when selling or raising investment

In my experience, the moment share capital trips people up is when they sit across from a buyer or an investor. Both sides will be talking about the issued share capital, the nominal value and the price being paid above it, and if you are not sure what those words mean it shows.

If you can explain your issued share capital, confirm the nominal value, and say whether your articles still carry an old authorised share capital limit, you come across as someone who understands what they are offering. That makes the process smoother and reduces the risk of jeopardising the sale or the investment over something that is easy to learn.

Next steps

Pull up your articles of association and your Companies House filings and check three things: what your issued share capital is, what the nominal value of your shares is, and whether an old authorised share capital limit is still in your articles. If you are planning a sale or an investment round and anything does not add up, or if you want to create different classes of shares, speak to a corporate solicitor before you start negotiating. Related reading: classes of shares explained and how to create different classes of shares.