Share capital is the amount of money a virtual business raised or intends to raise by issuing ordinary shares and/or preferred shares. It is referred as equity capital. The amount of share capital changes over time with additional private placements, share issuances and even public offerings.
The term share capital means slightly different things depending on the context. Accountants have a much narrower definition and their definition rules on the balance sheets of companies. It means the total amount raised by a company in sales of shares. Board of directors and Entrepreneuers have a broader definition and their definition rules on the business nature of the company. A company requiring larger capital committments can mean a larger share capital amount.
What share capital means to your virtual business?
- It is the amount of money it raises from selling ordinary or preferred shares, or
- It is the authorized capital that is the maximum amount of capital a virtual business has been approved to raise in a private placement or offering.
- You can opt for a new offer of shares in order to increase the share capital of the virtual business.
- It can be issued with or without full payment from shareholders. The minimum issued share capital is SGD 1 when set up your virtual business.
Virtual business share capital example 1
Virtual business ("VB") ABC is a consulting business. It requires SGD 5,000 to start the business as working capital. It issues 5,000 shares at SGD 1 each to its shareholders. This brings the issued ("authorised") share capital to SGD 5,000.
However, the shareholders have only paid up 50% of their shareholding, which means that the paid-up capital is SGD 2,500 and the unpaid share capital is SGD 2,500. The total share capital is still SGD 5,000.
If the shareholders pay the remainder 50% of their shareholding, then VB ABC's paid-up capital will be SGD 5,000 and the unpaid share capital will be $0. The total share capital is still SGD 5,000. If VB ABC issues new shares in future, the amount of total share capital and paid-up capital will increase accordingly.
How do we determine the value per share?
The value per share is usually always arbitruary at the beginning since there is no actual basis to determine the share price. Typically we start value at SGD 1 or USD 1 per share for simplicity purposes. As the VB progresses and outlook becomes clearer, the board of directors of the VB can derive at a better share price and authorised share capital to carry out the business plan.
Types of Share Capital
Under your virtual busines, these are the different types of share capital.
Authorised share capital - Equivalent to total share capital or just share capital. It is the amount of money that the virtual business has authorised to be issued to shareholders to raise equity capital, so that it can carry out the business plan or project. The VB board must obtain permission to sell or receive capital for the sales, by specifying the total amount of capital it wants to raise and the share price per share. There is no limit to the amount of share capital, share price or number of shares a VB may authorise and issue, but there is a ceiling on the total number of shareholders. For a private virtual business exempted from audit, it cannot have more than 20 individual shareholders.
Ordinary shares - Ordinary shares are the most common type of shares. They typically carry voting rights but do not give shareholders rights to receive or demand for dividends. Ordinary shareholders typically receive less dividends compared to shareholders who hold preference shares. Companies may divide their ordinary shares into different classes (e.g. “A” and “B”) with different rights attached to each class.
Preference shares - Preference shares confer some preferential rights on the shareholder, superior to ordinary shares. Normally, the preferential rights are the rights to fixed dividends, priority to dividends over ordinary shares and to a return of capital when the company goes into liquidation. Preference shares are usually redeemed by the virtual business at anytime in the future, as the shareholders would have their capital paid back. The virtual business may redeem these shares at an agreed value on a specified date or at the discretion of the directors. Preferred shares can also be converted into ordinary shares after a particular period. Conversion prices are specified in the constitution. If the price of the ordinary share rises, the preferred shares does not rise accordingly as it allows the preferred shareholder to convert or purchase at a lower price.