7.2. .Types of share capital are identified as company’s Act

Types of Share Capital

Share capital represents the funds a company raises by issuing shares to shareholders. The Companies Act specifies the types of shares that a company can issue.

1. Ordinary (Equity) Shares

• Definition: Standard shares representing ownership in the company.

• Rights:

  • Voting rights at general meetings

  • Right to dividends (after preference shareholders)

  • Right to share in residual assets upon liquidation

• Risk & Return: High risk, potentially high returns through dividends and capital gains.

2. Preference Shares

• Definition: Shares with fixed dividend paid before ordinary shares.

• Rights:

  • Fixed dividend (priority over ordinary shares)

  • Usually no voting rights, except in certain situations

  • Priority in repayment during liquidation

• Types:

  1. Cumulative preference shares – unpaid dividends accumulate.

  2. Non-cumulative preference shares – unpaid dividends are not carried forward.

  3. Redeemable preference shares – company can buy back at a future date.

  4. Convertible preference shares – can be converted to ordinary shares.

3. Issued, Authorized, and Paid-Up Share Capital

• Authorized Capital: Maximum amount of share capital a company can issue.

• Issued Capital: Portion of authorized capital actually issued to shareholders.

• Paid-Up Capital: Portion of issued capital actually paid by shareholders.

Example:

• Authorized: Ksh 1,000,000

• Issued: Ksh 600,000

• Paid-up: Ksh 500,000

4. Accounting Treatment

• Dr Cash/Bank – when money is received

• Cr Share Capital (Ordinary/Preference) – increases equity

Short Exam-Ready Summary

1. Ordinary Shares: Voting rights, dividends, residual claim.

2. Preference Shares: Fixed dividend, priority in liquidation, usually no voting.

3. Authorized, Issued, Paid-Up Capital: Legal and accounting distinctions.