Share Capital vs. Share Premium: Key Differences Explained
Share capital is the cash investors pay to own a slice of the company; share premium is the extra cash they pay above that slice’s face value.
People mix them up because both appear on the balance sheet under “equity” and both come from investors. But only the premium tells you how much the market loves the stock beyond its nominal sticker price.
Key Differences
Share capital is the legal par value set by the company; share premium is the excess investors willingly cough up. Capital is locked in forever; premium can be used for bonuses, buybacks, or absorbing losses. Regulators often ring-fence capital but let premium flow more freely.
Which One Should You Choose?
You don’t choose—markets do. If your startup issues $1 shares at $10, you’ll record $1 as share capital and $9 as share premium. Use capital for compliance bragging rights and premium for growth hacks like employee stock options.
Examples and Daily Life
Imagine buying a $1 lottery ticket for $5; $1 is your capital stake, $4 is your premium hope. In a seed round, investors might pay $5 per $0.0001 share—$0.0001 goes to share capital, the rest to share premium, cushioning future dilution.
Can share premium be returned to shareholders?
Yes, via bonus issues or buybacks, subject to solvency tests and local corporate law.
Does share capital affect voting rights?
Usually, voting rights attach to the number of shares, not their premium, so capital determines control.
Is share premium taxable income?
No, it’s equity, not revenue, so it doesn’t hit the profit-and-loss or corporate tax bill.