Share Capital: What it is and how to define it in your company

If you are in the process of opening a company and have questions about the subject Share Capital, today we can help you.

Share Capital is nothing more than the initial investment value of a company, which serves to keep it active until it starts to make a profit.

That said, if you want to know how to calculate this value, what the rules are for defining it, and how it affects the company's corporate structure, keep reading!

What is Share Capital?

Many budding entrepreneurs face the issue Share Capital with some concern, after all, the concept does not provide us with much information about its usefulness and purpose.

But, know that it is much simpler than it seems, since the Share Capital is the initial investment value, and serves to keep the company running until it positions itself in the market and begins to generate returns (profit).

This initial investment is called Share Capital because it is formed by the transfer of values and assets from partners and investors in the business.

These investments are converted into shares or stocks in the business, which determines the level of participation of each partner/investor.

It is important to say that the existence of this initial value is fundamental to guarantee the structuring of the company in the market, since the first months and years do not usually bring profits, and without this financial support, keeping the business running becomes much more difficult.

Share Capital and Shares: Understand the Relationship

You've probably wondered about the formation of a company's shareholder structure. After all, how is the relevance of each shareholder determined? One of the most common ways is through share capital.

As we saw previously, Share Capital serves to “build” the company and comprises the investments made by each partner or investor.

Furthermore, we also saw that these values are converted into shares, so that those who invest more end up having more shares in the company.

For this reason, the majority shareholder is the one who offers a greater investment for the opening of the company, and the level of relevance of the other shareholders is defined according to the investment made by each of them.

This is why the shareholder structure often changes: if a partner invests more in the company, they become more relevant in the structure.

Understanding this concept is important to build fair Share Capital, and thus attract more investors to the business.

How to define the value of a company's Share Capital?

There are no specific rules for defining a company's Share Capital, except in one specific case, which we will soon understand.

The fact is that the initial investment value must be defined by the business management, aiming to guarantee its operation until it starts to generate profit.

Therefore, setting a very low value for this stage may not be a good idea, after all, if the return does not appear in time, the company will incur losses.

What we mean is that this definition must occur through calculations and projections, aiming at the cost of operating the business for a given period, and the expected start of return.

Therefore, if your company is an individual sole proprietorship (MEI), limited liability company, sole proprietorship, or limited liability company, there is no legally established minimum share capital. This calculation is the responsibility of the business founders.

For companies in the Individual Limited Liability Company (EIRELI) category, there is a minimum share capital of R$100,000.

It is worth mentioning that, in this case, it is not necessary to present this value at the opening, but it is important that the company has it for annual tax and income declarations.

++Letter of credit: what it is and what it is for – Valor Notícias.

Is there a return to investors?

Yes, the amounts invested in Share Capital are returned to investors as the company begins to show profits. 

It is worth mentioning that this return usually occurs through the sharing of profits and results, and each investor receives a sum proportional to their investment.

Therefore, although it takes time, the return on this investment occurs, either all at once or through profit sharing.

What if the company doesn't make a profit and ends up closing?

If the company does not make a profit and ends up closing to avoid losses, in this case, the return of investments can occur through the sale of the business. 

However, if the business is not sold or there is still a loss, in this case, there is no return and it is considered that each investor assumed the risk of their investments.

For this reason, the decision to invest in a company must be made with caution, and it is necessary to calculate return projections in advance.

Is it recommended to take out a loan to make this type of investment?

As we saw previously, although there is a recommendation, Share Capital is not mandatory for all companies, with the exception of the EIRELI category.

However, we have also seen that the absence of this investment can cause problems, as it becomes more difficult to maintain the business until it turns a profit.

With this in mind, many entrepreneurs choose to take out loans to build equity capital. Is this a good idea?

If you don't have any capital to start your business and want a few months of peace of mind, a loan can help you build that capital, as loans in this category usually have a longer repayment period.

However, remember that like all types of credit, this one has interest, and this interest can affect the profitability of your business in the first few months.

Therefore, if you want to apply for a loan, do so cautiously and look for the best offer in terms of interest and payment terms.

Additionally, avoid taking out a loan without first establishing a projected return on your business. This will make it easier to determine whether the company will turn a profit in time to cover the loan repayments.

In any case, now that you understand what Share Capital is, it's easier to develop strategies to define your company's initial investment.

Read also: Types of companies that can be opened in Brazil: Discover the 6 categories – Valor Notícias.