Legal Definitions - capital surplus

Capital surplus refers to the portion of a company's equity that originates from sources other than its regular business operations or the stated par value of its common stock. It represents funds contributed by shareholders above the nominal value of shares, or gains from specific capital transactions, rather than profits earned from selling goods or services.

Think of it as money that comes into the company from its owners or from certain non-operating financial activities, which is distinct from the basic legal capital (like the par value of shares) and also separate from the accumulated profits (retained earnings) generated by the business itself.

• Example 1: Issuing Shares Above Par Value

  Imagine a new technology startup, "InnovateNow Inc.," decides to raise capital by selling 1 million shares of common stock. Each share has a nominal "par value" of $0.01 (one cent), which is a legal minimum. However, due to strong investor interest, the company successfully sells these shares for $5.00 each.

  How it illustrates capital surplus: The $0.01 per share (totaling $10,000) is recorded as the company's stated capital. The remaining $4.99 per share (totaling $4,990,000) that investors paid *above* the par value is recorded as capital surplus. This money came directly from the owners (shareholders) but is not part of the basic legal capital and is not a profit from selling products or services.

• Example 2: Reselling Treasury Stock at a Higher Price

  Consider "Global Manufacturing Co.", which previously bought back 200,000 of its own shares from the open market for $30 per share. These repurchased shares are known as "treasury stock." Later, the company decides to re-issue these treasury shares to new institutional investors, but the market value has increased, so they sell them for $35 per share.

  How it illustrates capital surplus: When Global Manufacturing Co. sells the treasury stock for $35 per share, it recovers the original $30 per share it paid. The additional $5 per share received (totaling $1,000,000) is a gain from a capital transaction involving the company's own stock, not from its core business operations. This $1,000,000 is added to the company's capital surplus.

• Example 3: Donation of Assets to a Company

  Suppose a local government wants to support a community-focused business, "Green Energy Solutions LLC," and donates a piece of land valued at $250,000 to the company for the construction of a new solar panel factory. Green Energy Solutions LLC does not issue any shares or pay any money for this land.

  How it illustrates capital surplus: Since Green Energy Solutions LLC received a valuable asset without paying for it or issuing shares, and it's not revenue from its business activities, the fair market value of the donated land ($250,000) is recorded as capital surplus. It represents an increase in the company's equity from a non-operating, capital-related event.