Business Studies Paper Example: Minimum Share Capital

The requirement of a minimum share capital to set up a company is an unnecessary burden for entrepreneurs

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Share capital refers to all the funds invested in a company by shareholders. This amount may change over time as the company diversifies and grows in operations. At the same time, it may reduce in value if the financial service of the company is poor or due to prevailing economic circumstances. A company in need of more capital or equity may decide to sell out its shares thus raising its share capital. At the same time, a shareholder may choose to sell their shares in the market although such a move cannot influence the financial position and performance of a company. The term "share capital," is often used generally to denote to the money raised by a corporation. However, narrowing it down, there are different groupings of share capital that include, paid share capital, issued share capital, and authorized share capital.

Before venturing to raise any form of capital, a company has to get the authority to execute its sale of stock by specifying the amount it wishes to raise, and the base value. Authorized share capital refers to the shares a business is willing to sell. For example, if a company is willing to raise $10 million while the stock per value is $5, it may only offer up to 2 million shares of stock. In this case, the total value of shares offers is referred to as its issued share capital. While the total value of the shares sold, is the paid share capital. This is what an entrepreneur buys when investing in a stock of a given company.

The formation of a company

The creation of any business in the United Kingdom and Spain follow the same procedure. It involves identification of a unique name, registration of the supposed address with the right authorities, identification of one director, identification of the guarantor or one shareholder who will serve as the director. Additionally, the members (shareholders) will provide the governing documents or commonly referred to as article of association and finally codes to explain the business the company will be engaged (Neville & Sorensen 2014). After the formation of the company, it can start business operation by using its legal documents, name, and identification logo. However, even after its formation, other members can still join the company by purchasing a given amount of shares as stipulated by the management and the available shares.

Entrepreneurs willing to participating in a startup company are often required to raise a minimum share capital to be shareholders of the company. This remains the most common raising capital for financing a startup company. The founder(s) of the company often tries to offer all the share capital needed for the startup and retains 100 percent ownership and control of the enterprise. Therefore, entrepreneurs are often roped in to add to the total share capital of the company while at the same time getting an opportunity to own the business through their acquired shares. To raise the share capital, an entrepreneur may use various means and sources to purchase the shares. These may include personal belonging such as private investment, cash, household items, and or through by borrowing. After the entrepreneur makes the purchase of the needed or necessary shares, the money invested becomes the property of the company. The entrepreneur cum shareholder makes a return on the investment by getting payouts of the profits realized by the company or in case the company is sold out; the profit may increase (Neville & Sorensen 2014). On a different note, the company may also finance its operations and increase its share capital by selling to external investors commonly called private equity investor as discussed above.

Many a time and in all activities of a company, only one member (shareholder) is responsibility for the day-to-day operation and operations of the business (Neville & Sorensen 2014). The majority shareholders such as the entrepreneurs only make critical decisions about important matters of the business such as altering the agreements, making changes to the articles of associations among others. The entrepreneur/ shareholder is practically detached from the company activities. The minimum share capital required of entrepreneurs can be traced back to the 20th century and its primary purpose is to protect creditors and provide confidence in the fluidly financial market (World Bank 2014). Additionally, in the early days, the law stipulated the minimum share capital. Currently, the scenario has since changed with each investor and company founders determining the value of the minimum share. Despite the burden put on entrepreneurs, investors argue that the minimum share capital enables them to invest cautiously with entrepreneurs bearing the heaviest burden of raising the minimum share capital.

Because the entrepreneurs have little role in the day-to-day management of the business, their ambitions, objectives, and financial goals may not be addressed by the company management. The minimum share capital only helps the firm protect the investor and creditors. In case the business fails, the entrepreneur stands the highest chance to lose as the investors are comfortably protected and guaranteed of returns. In such a case, the company will sell out its assets to recover the money to pay its creditors (Neville & Sorensen 2014). On the other hand, the investors or company managers will tend to make decisions based on their interests that will caution them in case the business goes under. The entrepreneur is left with no choice but to share in the losses. It, therefore, turns out that the minimum share capital is a substantial burden to an entrepreneur who plays periphery role in the critical management of the business. The founding shareholder finds refuge in financial losses by retaining the company assets.

Minimum Share Capital, a Burden

According to the World Bank (2014), the minimum share capital spoils for healthy competition by putting entrepreneurs at a disadvantage rendering them less capable of financing other investment opportunities. Since the dividend paid out is often little as compared to the requirement an entrepreneur may need to start up a venture. Ideally, a business enterprise is expected to come up with its strategies for raising capital instead of burdening entrepreneurs with a capital requirement. With increased number of companies trying to raise minimum share capital, entrepreneurs find themselves in a hard place, between deciding on going it alone or investing in a company. A study by European economies reveals that doing away with the minimum share capital raises the prospects of entrepreneurs investing in small and medium sized business ventures thus improving their financial independence and growth of the economy. For example, countries such as France, Poland, and Hungary that eliminated the minimum share capital have seen a growth and rise in new businesses created.

Despite the reasoning given for the need for minimum share capital, business ventures and companies have well-structured ways of protecting creditors, investors, and the business itself (World Bank 2014). Reasons are given for the need to protect the creditors do not lay a sound financial groundwork for a healthy economic survival. For example, in Hong Kong, and China, the Companies Act provides guidelines on the specific amount of minimum share capital and at the same time provides guidance on how investors and creditors are protected thus protecting entrepreneurs from exploitation with the need of a high minimum share capital. Additionally, companies do have different prospects of becoming solvent, a mechanism that guarantees protection from any forthcoming lose.

Often and many a time, minimum share capital is used by company chiefs to cover and engage in unrelated business activities immediately the company is incorporated. For example, Thailand and Luxembourg company heads and even entrepreneurs have the opportunity to withdraw minimum share capital thus the money provides no security to the business or even the investors (World Bank 2014). It is thus an unnecessary burden on entrepreneurs.

According to analysis, minimum share capital may not assist in helping the business remain afloat amidst insolvency or debt. Due to the high rate of recovery of investors, the minimum share capital plays an insignificant role in safeguarding the prospects of the business. Additionally, the according to financial results, countries that have a high minimum capital tend to establish very minimal banking financing. Upcoming and budding entrepreneurs with no relation wish a startup company managed to have or get credit financing from banking institutions. However, entrepreneurs with a high rate of investing in businesses and paying the minimum share capital trends to have no access to credit financing. It thus turns out that minimum share capital contributes to hindering entrepreneurs from accessing credit and laying a strong financial foundation for their small and medium enterprises. According to the World Bank (2014), there remains a strong indication that the minimum share capital is and remains an unnecessary burden to the majority of entrepreneurs despite the much hype associated with its realities. According to a survey of economies of the Middle East, North Africa, and some European countries, a majority of startup companies are in an aggressive competition with small and medium enterprises. Burdening entrepreneurs who are juggling between financing their business prospects, securing credit facilities, and raising the capital to fund minimum share capital have made the situation worse (World Bank 2014).

Conclusion

Although companies play a significant role in the economies of countries and financial markets, the reality of the minimum share capital is a burden to majority entrepreneurs. With increased demand for opportunities to invest, entrepreneurs find it technically challenging to raise finances for their business prospects and the minimum share capital. A close look at the returns from these companies regarding dividend, it is clear that the minimum share capital does not bring in the desired results and corporations stand to make more gains than the entrepreneurs do. Further, in the international markets, economies that do not have the minimum share capital perform better economically than countries that continue to liberalize company operations regarding raising the minimum share capital. Additionally, little gains in business operations ever result from the minimum share capital giving a clear indication that it is not a major factor in company financial transactions. Minimum share capital thus remains a major hindrance to the growth and operation of entrepreneurial ventures.

References

Neville, M., & Sorensen, K. E. (2014). Promoting EntrepreneurshipThe New Company Law Agenda. European Business Organization Law Review, 15(4), 545-584.

"Why are minimum capital requirements a concern for entrepreneurs?" Doing Business Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises (2013): 41-45. Web.