Capital stock of a company. What it is and how to calculate it

Riskallay

21/3/2023

7 min

The capital stock of a company represents the initial or subsequent contribution made by the owners of the company in order to fulfill the corporate purpose of the company. Its calculation depends on economic, legal and sectorial factors.

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What is the Social Capital of a Company?

The capital stock of a company represents the initial or subsequent contribution made by the owners of the company in order to fulfill the corporate purpose of the company.

When the partners decide to form the company, each of them can make contributions in cash or in kind, i.e., non-cash assets, which contributions may or may not be free of any debt.

The important thing about the capital stock is the subscription of shares or quotas, depending on its legal form, but above all its effective integration, since the separation of liability between the company and its partners lies in the effective integration of the assets that are represented in shares within the net worth.

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Characteristics of Social Capital

The capital stock, by itself, is not tangible, but is represented by shares or quotas. It is other components of the company's balance sheet that reflect the tangible or intangible composition of this capital stock.

That is to say, the shares or social quotas, are titles of possession of small equal parts of the company, which help to separate the responsibility between the activities carried out by the company and those of its partners in a personal way.

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Related content:

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Components of Social Capital

Viewed in the company's balance sheet, the capital stock is presented in two ways: as shares, quotas or equity interests, and also as assets and rights and debts held by the company itself.

Active

The assets of a company are the goods and rights owned by the company, which represent the use of the funds contributed by the partners and also by third parties through debts.

Liabilities

The liabilities of a company are the debts or obligations owed by the company to third parties other than its owners. It is usually a conventional form of financing in companies, to sustain the business line, without the need to resort to greater contributions of capital stock or the capitalization of its profits.

Equity

The net worth of a company represents the numerical difference between the assets and liabilities of the company, and is composed of both the capital stock and the results of fiscal years obtained by the company in the course of its business.

Legal Reserve

The legal reserve is a special reserve established by several local legislations, and also by the International Financial Reporting Standards, in order for the company to develop a "safety cushion", by keeping a certain proportion of the positive results of the fiscal years, to protect the capital stock from possible losses.

In the event that a company suffers losses in a business year, first of all, all the special reserves set up by the company to cover possible losses are used up, and finally, the legal reserve is used up, before having to go bankrupt due to the loss of capital stock.

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Calculate the Shareholders' Equity

The calculation of the capital stock is broken down as follows in the conventional equity equation:

Assets - Liabilities = Equity

Assets - Liabilities = Capital Stock + Reserves + Retained Earnings + Accumulated Results

Capital Stock = Assets - Liabilities - Reserves - Retained Earnings - Retained Earnings

Under this method of calculation, capital stock represents the assets and rights of the company, net of debts with third parties, reserves and accumulated results.

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What is the purpose of a company's Capital Stock. Main functions

The capital stock of a company is the common guarantee of the company's creditors, both third parties and partners. That is to say, when a company goes bankrupt or is liquidated for any other reason, the capital stock will guarantee that the debts with third parties will be paid, and if any of that capital remains, with its own owners for the contributions made.

Identification

The formation of the capital stock by means of shares, participations or quotas, depending on the applicable legal corporate form, will make it possible to identify the contributions made by each of the partners, and their percentage of participation in the company, which gives them different rights, but also obligations.

Profit sharing

The company's senior management, through the minutes of the general meeting, must approve the company's Balance Sheet, the Income Statement and other financial statements required by the different legislations, such as the Statement of Changes in Net Worth or the Statement of Source and Application of Funds, among others.

Once the general account for the year has been approved by the general meeting, if the company has made a profit, it may decide to set up reserves, distribute profits or even increase the capital stock.

In order to distribute profits, the proportion of shares or quotas held by each of the partners or shareholders must be respected, so that they obtain a return on the investment made, in accordance with the proportion of contributions made.

Voting rights

Each of the company's stockholders has voting rights in proportion to the shares he/she owns in the company. These shares may be common or preferred, and this must be taken into account when computing the number of votes that may be cast by each shareholder.

In the case of non-equity companies, each share represents one vote.

Warranty

The capital stock is the common guarantee of the company's creditors, considering in the first place third parties, such as suppliers, banks, the state, among other various creditors, and in the second place, partners or shareholders of the company.

When the company is dissolved and liquidated, either by the will of its partners or by bankruptcy, this capital stock will allow the company to pay off its debts to third parties and, if resources are available, its debts to its partners.

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Regulatory Principles of Social Capital

There are regulatory principles for establishing a company's capital stock, for example:

Determination

The capital stock is determined by the following formula:

Capital Stock = Monetary aggregation of Shares or Capital Stock

This first formula considers the capital stock as the sum of shares or quotas into which this capital is divided, measured in homogeneous currency, i.e., in the legal tender of the country where the company operates.

Capital Stock = Assets - Liabilities

At the beginning of the business activity, the capital stock is the difference between assets and liabilities. The partners of the company usually contribute this initial capital stock in cash or in kind, and in some cases, for example, when vehicles or real estate are contributed, they are pledged or mortgaged, a debt to be assumed by the company in the course of its operations.

Capital Stock = Assets - Liabilities - Reserves - Retained Earnings - Retained Earnings

Finally, the dynamic formula of the capital stock is shown, which aggregates reserves and accumulated results from the development of the business activity.

Stability

The capital stock must be stable, i.e. its composition must not be altered without a decision of the general meeting in plenary session. The decision to increase or decrease the capital stock may alter the course of business and the common guarantee of the creditors.

Reality

When incorporating a company, not only the minimum capital stock required by the legal regulations applicable to the country in which the company operates must be taken into account, but also the economic reality of the activity carried out.

For example: if the minimum capital to be contributed in an equis country is 10000 monetary units of legal tender of that country, but the company is going to be dedicated to the financial activity, or to an oil extractive activity, or to the construction, this minimum capital required by law will not be representative of the real capital stock that the company needs to operate.

Minimum Capital Stock

These are the minimum legal tender monetary units, in the country where the company operates, that must make up the initial and minimum capital stock to operate.

This minimum capital stock depends on local legislation and also on the type of company, being different for a corporation than for another type of company.

In addition, the specific regulations of the activity to be developed must be taken into account, which may require a specific minimum capital stock.

Companies operating in multiple jurisdictions should also verify the amount of minimum share capital required to operate in the different countries according to their activities.

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The importance of Social Capital in a company

The capital stock of a company is a sine qua non requirement for its operation, i.e., to keep the company going. A company that cannot maintain its capital stock is considered bankrupt.

The benefits of having strong equity capital are as follows:

To guarantee the operation of the companies if it is the decision of their owners, they continue to operate.
To guarantee the payment of the company's creditors in the event of bankruptcy or dissolution for other reasons.
Adequately represent the portions of contributions made by the partners or shareholders, which allows the correct distribution of profits, and also the exercise of equitable voting rights at meetings.

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