File : Share capital

Part 1

Understanding share capital

Understanding share capital

Share capital fulfils several roles: company funding, guarantee for third-party creditors, and distribution key of rights and powers within the company; it can be seen as a multifunction instrument serving additional interests: not only those of the company, but of its owners and creditors.


Share capital represents the original value of the sums of money and/or assets placed at the disposal of the company at the time of its creation, by the founding partners or shareholders. In exchange, the latter receive company shares that represent their contribution to performing the corporate object. The amount of capital is mandatorily mentioned in the articles; however it can vary throughout the life of the company.


Distinguishing share capital from other important parameters

Distinction between share capital and contributions
The share capital corresponds to the total amount of the assets or securities (sums of money, members shares or shares of other companies, buildings, goodwill, brands, patents etc) that are "contributed" to the company.

In exchange for the amount or the assets that he has committed to the company, i.e. in exchange for his contribution, each contributor receives members shares or shares, which confers upon him the quality of partner (in the case of members shares) or shareholder (in the case of shares) of the company. The share capital, the sum of all these contributions, is distributed between the partners or the shareholders of the company.

Good to know: the partners (holders of members shares) or the shareholders (holders of shares) are the company's first creditors, since it must in theory refund them for their contributions when it is dissolved. However, the "special creditors" represented by the partners or the shareholders are in a way the lowest ranking creditors: they will be the last to be refunded, after all other external creditors, should the company have to pay back debts.

These assets and securities, known as contributions, are contributed to the company when it is created, by the holders of part of its capital, who are the shareholders (in the case of companies the capital of which is divided into shares, known as "joint stock companies") or its founding partners (for the other cases). However where applicable, after the company has been created, and throughout its lifetime, assets or securities can also be contributed to it in order to increase the capital.
The contributions are more specifically made available to the company by each contributor:
– either in full ownership;
– or in usufruct (this implies that two persons are involved, the usufructuary and the bare owner, who are linked by the same object: the usufruct. This involves the division of the right of ownership, giving its titleholder, the usufructuary, the right to dispose of or use an object of which he may enjoy the profits, in other words the revenue, but without owning the object, in other words he cannot sell or destroy it: this right belongs to the bare owner);
– or in use (this is distinct from usufruct in that only use of the object is allowed; it is not at the holder's disposal in other words he made neither sell nor destroy it, nor keep the revenue).

Good to know: "Professional" contributions (i.e. technical, professional, non-patentable knowledge, experience, activity, relationships that a person places at the service of the company) are excluded from the share capital, mainly because it is not easy to estimate their value and impossible for third parties to use them as a guarantee against their claims on the company. This type of contribution confers the right to professional shares and therefore to profits.

Distinction between share capital company assets
The distinction between the share capital and company assets is mainly on the accounting level; for this reason it is particularly important for the company's creditors.
The capital of a company represents, "on the liabilities on the balance sheet", resources that the partners or shareholders have permanently deeded to the company. This is an accounting entry concerning contributions made by the partners or the shareholders when the company was created, or where applicable, in the course of capital increase operations.
Company assets on the other hand, used by the company, in the form of assets and securities (mainly land, commercial premises, factories, machines, stocks, patents, brands, subsidiaries, customer receivables, liquidities) show on the balance sheet as assets, part of all of the resources at its disposal. This is an accounting entry that applies to use made by the company of its resources, whether they are initial contributions or other resources, such as its turnover.

Distinction between share capital and net company assets or equity
The company's net assets are measured by the difference between the total amount of the company's assets and the total amount of all that it must pay to third parties, known as "external liabilities" (financial debts, including loans; contractual debts to vendors; company debts including salaries due; , tax debts of various types etc). The liabilities in this case are known as "external" because they concern creditors outside the company, distinct from its partners or shareholders.
In practice, the difference between company assets and external liabilities, the net company assets, correspond to the amount of resources belonging to the company, known as "internal liabilities". This is why internal liabilities are considered to be "equity" or "equity capital".
The total of the foregoing are the sum of, mainly:

  • contributions by the company's owners, partners or shareholders, making up the share capital;
  • reserves representing the non-distributed part of profits from past accounting fiscal years, after deduction of observed losses in the course of said fiscal years.

Thus, share capital can be defined as one of the components of equity.

Should the company be liquidated, the amount of equity represents the liquidation "boni", in other words the value of the assets that the partners or shareholders would be able to share out at that time. In the course of the company's life, for example, when members shares or shares are transferred by the partners or shareholders, this amounts serves to evaluate the unit value of the shares. This is why determining the amount of equity is a way of estimating the value of a company.

Distinction between share capital and company assets
Share capital is merely one element among a larger ensemble, the company's assets, which includes all the rights and obligations as well as the company's payables and debts.

Good to know: contrary to companies, the individual business does not possess share capital.


Consult the annual account of a company or business
See our topical dossier on filing annual accounts

Purposes of share capital

Share capital as a funding resource
Share capital is a specific mode for funding the company. For example it can be used to offset a company's temporary losses when it is lacking sufficient equity, and can temporarily avoid a situation of suspending payments.
This type of funding has at least the advantage, contrary to conventional funding (loans) to of having a single, usually distant maturity date; the date for dissolving the company as set out in the articles of association. In addition, the cost of this type of funding, in other words reimbursement of the subscribed capital, can be freely determined by the partners or shareholders.
However, the usefulness of this funding instrument is on the decline in view of certain rules becoming more flexible in the case of several types of company. For example there is no minimum amount required by the law concerning capital for certain legal forms; this makes it possible to set up a company with share capital that would normally be insufficient in terms of banking requirements. Similarly, the ability to delay complete release, in other words total payment of the share capital, means that it is less commonly used as a way of funding the company.

Share capital, protection of third party creditors
Regarding the company's creditors, the amount of share capital is less a guarantee than an indication of the company's financial health: the law has set 50% of the amount of share capital as the minimum threshold below which equity cannot be allowed to be reduced without threatening the company's financial viability.
Certainly, in theory, in companies where is the partners or the shareholders are liable for debts only to the extent of their contributions and not their personal assets, share capital constitutes a form of guarantee for third-party creditors. Partners or shareholders are not liable for the company's debts to the extent of engaging their personal assets, for example, in limited liability companies (SARL) and limited companies (SA): the share capital, the sum of the contributions, would in such case be, for third parties, a first indication of the company's ability to repay its debts.
Application of various legal and accounting principles (the principles of reality, fixedly and intangibility of capital) results in freezing, on the assets side of the balance sheet, a total amount corresponding to the share capital (which for its part is shown on the balance sheet's liabilities side). In practice, during the company's life, share capital cannot be restored to the partners or shareholders.
However, the effectiveness of protecting creditors through share capital is not obvious. Firstly, it is the company assets that constitute genuine protection for creditors, because they represent the only property and securities that can be directly seized by creditors. However, freezing the capital cannot prevent the disappearance of the company assets through the effect of cumulative losses of the company and therefore elimination of an effective guarantee creditors.
Secondly, the notion of share capital as protection for the company's creditors has become doubtful through the elimination of a minimum share capital amount requirement in many types of companies (especially SARL companies, limited partnership companies, general partnership companies, simplified joint stock companies, and several types of civil companies).
Finally, in companies where the liability of each of the titleholders, partners or shareholders of the capital is limited, the fraction of the capital representing the maximum amount of their commitment in meeting company payables, serves to protect their personal property against any prosecution from the company's creditors.

Share capital, the key to the distribution of the rights and powers in a company
Often, the voting rights of each partner or shareholder in the general assemblies, and the profit amounts they receive in the form of dividends, are set in proportion to the amount of share capital that they hold.
However this principle of proportional distribution is not intangible. It can be exceptionally changed with a different distribution of the powers and pecuniary rights, set out in the company's articles.
For example, it is possible to set out equal share of profits and losses, independently of any only equal distribution of the share capital, or conversely. Moreover, in certain companies, the law allows the creation of specific articles (such as preference shares in the case of limited companies) that do not carry voting rights and/or that confer for example a special pecuniary advantage by comparison with conventional securities.
In addition, the voting rule may directly depend on the company's legal form. In this way, in companies that have a strong intuitu personaecomponent, in other words where a person is considered as an essential element of the company contract, voting rights can be equal for each person, without taking into account the capital held by each partner.

See our topical dossier on suspension of payments