Shares

lgarside

This is going to sound like a really stupid question, but I can't get it into my head what shares are. For example if two partners put 10,000 each into a business the capital will be 20,000 (the business owes them 10,000 each). If two people join under a company and they put 10,000 each into the business
so at the start of business there is 20,000 in the bank to buy assets, stock etc this debits the bank and credits the share capital nomonal? I don't understand then the shares, does this mean there is issued share capital of 20,000 and they have to put another 1.00 into the business each to own 50%or can they just put 1.00 each into the business and say the share capital is 100.00 so by putting 1.00 each into the business (so the bank is debited with 1.00 and the share capital nominal is credited with 1.00) they both own 50%

As you can see I'm a little confussed.....................:-)

peugeot

A limited company has to have share capital and thus has shareholders who can receive dividends from post-tax profits on their shareholding (ie a return on their investment). In your example the £20k put in by the 2 shareholders will be 'issued' share capital (debit cash/bank, credit shares capital) but different companies have different amounts of capital. Some have £100, some just have £1. So if 1 shareholder puts £10k in and the other £10k they will both have a 50% holding. In the example you cite the shareholders don't have to put another £1 if they don't want to. The money they've contributed will be paid into the bank (i.e. dr bank,cr capital). When the money is used to buy assets it will cr bank, debit (various) assets.

If 1 shareholder puts £16,000 in and the other £4,000 then the shareholder that put the £4k will have a 20% holding, the other 80% therefore will be the controlling party (anyone who has more than 50% is the controlling party).

So shares determine the ownership of the company and if there is a controlling party. There is also the 'authorised' share capital, the concept of which is soon to be abolished. This is the maximum amount of shares a company can issue under its current articles. It may have to amend its articles if it wants to issue more than the authorised capital.

Hope that helps.

Steve

lgarside

Thanks Steve that does help, the concept of authorised/issued share capital is still fuzzy to me. So if theoretically someone put 50,000 into the business and someone else put 10,000 into the business they own 83 % 17% respectively. What is authorised capital in relation to the above 1 for a ltd company and 2 is they became a plc?

Thanks again for all your help

peugeot

The authorised share capital of a business whether private or public is the total amount of shares the articles of association allow the company to issue. Called up share capital is the capital that has been 'called up' and paid for.

For example, Company A Ltd has 2 directors who are also the shareholders. Upon formation of the company, the articles of association state that the company is AUTHORISED to issue up to 1,000 ordinary shares. The two directors have agreed to put in £50 each to purchase their ordinary £1 shares. So company a has:

Authorised share capital of 1,000 shares
Called up share capital of 100 shares (so essentially it can issue a further 900 if it so requires).

If a company wants to issue MORE than their authorised share capital, then it must alter its articles of association.

It is to be noted that the concept of authorised share capital is soon to be abolished, because in all fairness the actual concept of it is meaningless.

Kind regards
Steve

lgarside

Thanks Steve I get it!!!! Who hoo. The books don't really break it down into the constituent parts but now that makes so much sense. Thank you