Large or small social capital? This choice can have serious consequences. It must, therefore, be matured upstream of the creation and throughout the life of a company. “Small business leaders think in terms of how much money they have, not how much money they need. It’s a mistake”, warns Pascal Ferron, vice president of the Walter France accounting firm.
The share capital makes it possible to start its activity, finance its launch and avoid treasury tensions during the first months of activity. Therefore, it must be evaluated accurately according to the investments to be made. “Clearly, the more the company has immediate needs, the more the equity value will have to be adjusted and increased,” adds Pascal Ferron.
All companies are therefore not necessarily destined to have a large share capital. An entrepreneur who launches a consulting activity that only requires the purchase of a computer, or a family business that does not want to receive investors, can be satisfied with a low share capital.
Use the associated checking account
To strengthen their financial credibility, at first or later, entrepreneurs can fund their company’s associate’s checking account. Instead of having a capital of 100,000 euros, this sum can be divided between the share capital and the current account of the partner. Financial institutions generally take these contributions into account before granting loans. “But sometimes they ask to block the checking account for a certain period of time. This means that the leader cannot recover that amount for five years in general,” reports the accountant.
However, too little social capital can penalize a structure. If the company registers losses and, on the balance sheet, its share capital becomes less than half of the share capital, the law provides that the shareholders must decide, within four months after the approval of the accounts that demonstrate this loss, whether the case, after the early dissolution of the company.
For example, a company whose share capital is set at 10,000 euros has a loss of 7,000 euros. The value of its equity thus amounts to 3,000 euros and, consequently, is less than half of the share capital. “The decision of the partners, provided for in art. head of the legal department at Advisia, a legal subsidiary of Cerfrance Finistère.
Divide capital to multiply shares
From there, the share capital also becomes a public and financial communication element, namely indicated on all company invoices. Thus, potential future suppliers may see a lack of credibility or financial strength.
Too little equity capital can also be problematic when you want to go public or get financing. This risks delaying financial partners. If a request for funding is made, the lending institution will require the founders to personally provide part of the need to be financed, on the order of one third of the total amount. “If a manager puts 100 in his share capital or in a partner’s current account, the bank lends 200”, assures Pascal Ferron.
However, instead of increasing its share capital, when a company receives new investors, it can also choose to split it. “A company that had 100 shares at 1,000 euros will subdivide the nominal and increase the number of shares to have, for example, 10,000 at 10 euros”, explains Pascal Ferron. The advantage of multiplying the number of shares in this way? A fast-growing company whose individual stock value is growing can thus ensure that tickets become more affordable for new investors.