The importance of social capital

With company formations, it is important to consider the amount of share capital you select at the time of incorporation. Share capital is the nominal value of shares within a company, calculated by the number of shares multiplied by the value of each allocation. There is some variation within allocation capital types, in addition to allocation types. It’s important to understand the difference between the terms when you initially set up your business, to avoid costly changes at a later date.

The share capital can be divided into authorized allocation capital and issued allocation capital. The authorized share capital refers to the maximum amount that the company can issue, without going to the shareholders for subsequent approval by resolution. Prior to October 1, 2009, it was a legal requirement for limited liability companies to establish a level of authorized allocation capital. With this legislation no longer in force, the term has become less common. Issued share capital, on the other hand, is the actual value of the shares that have been issued to shareholders. With new company formations, it’s important to make sure you issue the right number of shares from the start.

Although possible, it is more difficult to change the level of social capital after incorporation. In addition to considering the current position of the company, it may be useful to also consider the potential position of the stock in the future. If the company seeks to attract shareholders at a later date, the amount of issued share capital should be an easily divisible number. The benefit of this is that the addition of additional shareholders can occur through a transfer, as opposed to the need to issue new shares.

The second important consideration regarding stock decisions is whether all of your shareholders will receive the same rights and dividends. A company may decide to delegate benefits from particular shares to different groups of shareholders through a system of share classes. The classes of ordinary shares are ‘common shares’, ‘preferred shares’ and ‘redeemable shares’. Common stock is the most common type and describes shares that have standard rights and dividend rights attached. Preferred shareholders, on the other hand, are entitled to receive their dividend payment earlier than other classes of shares. It is often the case that this preference supersedes other stock rights, such as the right to vote on company decisions.

As stated above, although it is possible to change the level of share capital of a company after incorporation, the procedure can be difficult. To increase the share capital, the company would be required to issue new shares. To lower it, the company would need to buy its own shares or undertake a share redemption program. There are other ways in which a company can modify or reduce the share capital, although it is advisable to incorporate the company with the desired amount.

When setting up a company, either directly or through a company formation agent, the legal requirement is to issue at least one share to a shareholder. Although this is the minimum legal requirement, it is recommended to consider the potential benefits of a higher level of share capital and the possibility of varying participation rights.