If you’ve decided to create a limited company (sociedad limitada), one of the most important questions to consider is what share capital a limited company needs. This post tells you how to calculate this figure, what the share capital is for and whether it can be modified in the future.
What is share capital?
The share capital of a company is the set of contributions made by the partners or stockholders of a company without any right to reimbursement.
It is a part of the company’s assets, which are not affected by losses except in cases of bankruptcy proceedings.
The share capital may consist of monetary or non-monetary contributions. In a limited company, it is divided into shares (participaciones) and in a joint-stock company (sociedad anónima) into stocks (acciones).
How is the amount of a limited company’s share capital determined?
You should bear in mind that the Corporate Enterprises Act (Ley de Sociedades de Capital) requires a minimum of €3,000 in capital for limited companies. In most cases, it is advisable for the share capital to exceed this minimum and be an amount that is deemed sufficient for the investment to be made.
Having a share capital above the minimum and one that is adequate for the company’s activity can have the advantage of generating greater confidence among investors, the company’s creditors and financial institutions, in the event of financing being required.
However, if the share capital is too high, the risk for the shareholders is also increased since this capital will be used to cover the company’s debts.
What are the functions of a limited company’s share capital?
The following are some of the most important functions of share capital.
- Distribution of profits. The share capital determines the shares of each partner in the company and if profits are distributed in the future, this distribution will be made according to the shares of each partner.
- Voting rights. As a general rule, and unless stated otherwise in the company’s articles of association, the right to vote in the company (for example, at a stockholders’ meeting) is determined by the shares of each partner.
- Guarantee. As its main function, share capital is the guarantee for third parties that the company will respond to its debts to creditors.
Can the share capital be changed in the future?
The capital of a company can change over time. There are two possible scenarios:
- Capital increase. This can occur, for example, when new stockholders are invited to join the company. It can take place in two ways, which are by issuing new stocks or by increasing the nominal value of existing stocks. The capital increase can be made in several ways:
- Through new shares, which can be monetary or non-monetary.
- By offsetting claims against the company.
- By transforming reserves or profits into share capital.
- Capital reduction. A reduction in the share capital of a company can be made for several reasons, such as the elimination of losses or the return of shares to shareholders. It can take place in several ways:
- By reducing the nominal value of the stocks.
- Through the amortisation of a certain number of stocks.
- By grouping stocks for exchange.
How is a limited company’s share capital deposited?
In the case of monetary contributions to a limited company’s share capital, a bank account must be opened on behalf of the partners or the director of the entity. At the time of opening the account, it should be made clear that the company is in the process of being formed.
Who needs to deposit share capital?
The share capital must be deposited in the bank account by each partner in accordance with their share in the limited company. The bank will issue a certificate specifying the share of each partner.
Is it possible to use the share capital when the company is established?
Once the company is formed and registered in the Mercantile Register, the money that has been deposited in the bank can be used. The bank will then remove the words ‘in formation’ from the account.
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