How to handle share capital in a co-op (From Co-op Creator) [2 Articles]
~ Friday, September 1, 2023 Blog Post ~
What is share capital?
While incorporating a co-op, and planning to raise money, words like ‘shares’, ‘capital’, and ‘share capital’ get used a lot. Building a sound business and raising funds requires an understanding of what these terms are and why they’re important for co-ops. This resource is meant to explain how to handle share capital in the context of a co-op.
Simply put, share capital is the money a business raises in exchange for ownership in the company. For co-ops, this usually refers to the money an individual pays to become a member.
What are Shares?
Let’s complicate things a little. The way you become a member of a co-op depends on the process set out in the co-op’s bylaws. Usually this involves completing an application form and committing to use the services provided by the co-op. Another important step most co-ops use is requiring that members purchase shares in the co-op. Shares are individual units of ownership. Co-ops can issue two types of shares:
- Membership shares: These shares give their purchasers ownership in a co-op, the right to vote at members’ meetings, and the right to receive a share of the co-op’s profits. Each membership share is usually assigned a par value (i.e. the value doesn’t change) of $1 and members purchase a set number of shares (e.g. 10 membership shares for $10). Most co-ops issue unlimited membership shares.
- Investment shares: These shares are used to raise money and they do not give their purchasers the same rights as membership shares. Investment shares are usually worth more than membership shares (e.g. $1000), but they come with financial perks, rather than ownership and control. If the co-op declares a profit, the co-op must prioritize paying a dividend to investment shareholders and if the co-op dissolves, investment shareholders get their money back before members. Co-ops that issue investment shares should have a financial and strategic goal in mind. For example, if you want to raise $100,000 from investors, you might issue 100 $1000 investment shares.
Wait, why $1 shares?
While this isn’t required, many co-ops assign their membership shares a $1 value. There are three important benefits that come with this decision:
- It allows members to easily purchase their membership in installments. For example, a co-op that requires $1,000 to become a member could allow its members to purchase $100 worth of membership shares each month until they reach the required amount. The co-op’s treasurer would keep track of things in the co-op’s member registry, and the membership would become active once they are paid up.
- It gives the co-op more flexibility when members withdraw from the co-op. When a member wants to end their membership, the co-op must redeem (buy back) their membership shares. This can be a big problem if the co-op has limited funds and multiple members want their money back. When shares are worth $1, the co-op can redeem shares in installments to better manage their cash flow.
- It allows the co-op to easily adjust the price of membership. Whether you want to reduce the cost of membership to encourage new people to join or you want to increase the cost of membership to keep things exclusive, $1 membership shares make things easier. A co-op’s articles of incorporation set the cost of membership shares and are much harder to change. If you set the price of your membership shares at $1, you can determine how many membership shares are needed in the co-op’s bylaws, which are much easier to change. Not sure of the difference between bylaws and articles? Check out this video.
No shares, no problem
Some co-ops incorporate without share capital — community service co-ops or co-ops that want to obtain charitable status, for example. In these cases, membership in the co-op may be free or there may be a membership fee. Membership fees can be required one time or annually. And, unlike shares, they don’t have to be repaid. Some co-ops use annual membership fees to help offset regular capital costs or weed out inactive members.
Where do we start?
To get started, estimate how much money the co-op needs to raise. From there, determine how much members should pay for a membership and how many people could be involved. Starting on a business plan at this point is a good idea. A business plan provides good cost estimates and a solid understanding of what the co-op is going to do. Be sure to explore all the financing options available to a co-op to identify what will work best in your case.
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Article #2: What Is Share Capital? How It Works and Types (From Investopedia)
By Alicia Tuovila, June 12, 2023
What Is Share Capital?
Share capital is the money a company raises by issuing common or preferred stock. The amount of share capital or equity financing a company has can change over time with additional public offerings.
The term share capital can mean slightly different things depending on the context. Accountants have a much narrower definition and their definition rules on the balance sheets of public companies. It means the total amount raised by the company in sales of shares.
KEY TAKEAWAYS
- A company’s share capital is the money it raises from selling common or preferred stock.
- Authorized share capital is the maximum amount a company has been approved to raise in a public offering.
- A company may opt for a new offer of stock in order to increase the share capital on its balance sheet.
Understanding Share Capital
Share capital is reported by a company on its balance sheet in the shareholder’s equity section. The information may be listed in separate line items depending on the source of the funds. These usually include a line for common stock, another for preferred stock, and a third for additional paid-in capital.
Common stock and preferred stock shares are reported at their par value at the time of sale. In modern business, the “par” or face value is a nominal figure. The actual amount received by a company in excess of par value is reported as “additional paid-in capital.”
Important: On a balance sheet, the proceeds of stock sales are listed at their nominal par value while the “additional paid-in capital” line reflects the real price paid over par for the shares.
The amount of share capital reported by a company includes only payments for purchases made directly from the company. The later sales and purchases of those shares and the rise or fall of their prices on the open market have no effect on the company’s share capital.
A company may opt to have more than one public offering after its initial public offering (IPO). The proceeds of those later sales would increase the share capital on its balance sheet.1
Types of Share Capital
The term “share capital” is often used to mean slightly different things depending on the context. When discussing the amount of money a company can legally raise through the sale of stock, there are several categories of share capital.
Accountants have a much narrower definition.
Authorized Share Capital
Before a company can raise equity capital, it must obtain permission to execute the sale of stock. The company must specify the total amount of equity it wants to raise and the base value of its shares, called the par value.
The maximum amount of share capital a company is allowed to raise is called its authorized capital.
This does not limit the number of shares a company may issue but it puts a ceiling on the total amount of money that can be raised by the sale of those shares. For example, if a company obtains authorization to raise $5 million and its stock has a par value of $1, it may issue and sell up to 5 million shares of stock.
Issued Share Capital
The total value of the shares a company elects to sell to investors is called its issued share capital. The par value of the issued share capital cannot exceed the value of the authorized share capital.
Share Capital on a Balance Sheet
The technical accounting definition of share capital is the par value of all equity securities, including common and preferred stock, sold to shareholders.
However, people who are not accountants often include the price of the stock in excess of par value in the calculation of share capital. As noted, the par value of stock is nominal, typically $1 or less. So, the difference between the par value and the real sale price, called paid-in capital, is usually considerable. Nevertheless, it is not technically included in share capital or capped by authorized capital limits.
Here’s an example, and how it appears on a balance sheet: Assume company ABC issues 1,000 shares. Each share has a par value of $1 and sells for $25. The company’s accountant will record $1,000 as share capital and the remaining $24,000 as additional paid-in capital.
Is Share Capital the Same As Equity?
The share capital is the part of a company’s equity that it has raised from issuing common or preferred shares and is different from other types of equity accounts.
What Are the 2 Classes of Share Capital?
Share capital is considered to be either common or preferred stock.
What Are Other Names for Share Capital?
Share capital is also called shareholders’ capital, equity capital, contributed capital, or paid-in capital.
The Bottom Line
Share capital is the funding a company has raised through issuing common or preferred stock. Authorized share capital is the maximum amount of share capital a company is allowed to raise. Issued share capital is the total amount of shares a company opts to sell to investors. A company that wants to raise more equity and increase its share capital can do so by obtaining authorization (from its Board of Directors and shareholders) to issue and sell additional shares.
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