Attentive investors know that understanding basic accounts of accounting and corporate structure is critical to evaluating a company. Among these concepts, the social capital stands out. He indicates how much the partners have initially invested in the business and demonstrates their commitment to the company - a factor that can signal financial solidity and inspire confidence in customers, suppliers and investors. In this article, we will clearly and objectively explain what is social capital, how it works in the Brazilian business environment and what is the relationship (and difference) between social capital and the valuation of a company. After all, as important as it is, capital stock does not tell the whole history about the value of a business.

What is social capital? Legal and financial definition

Social capital is the total amount of cash, goods or rights that a company's partners invest to finance the opening and start of its operations. In other words, it is the amount that forms the financial base of the business, used to buy equipment, pay initial expenses and support the company until it starts generating its own revenues. legal point of view , the capital corporate is a mandatory clause in the constitutive documents (such as social contract or statute) and must be registered with the competent bodies (commercial board, in the case of business companies). This means that every Brazilian company, when constituted, needs to formally declare its social capital, divided among the partners according to their participation.

financial and accounting point of view , the capital stock appears in the balance sheet within the equity group (also called the company's own capital). It represents the initial investment of the partners at the time of the company's creation, including cash, material goods (such as machines, real estate, vehicles) or immaterial goods (such as patents, brands) for the business. This initial value is important to give the company breath in the first operations and serves as a original fund to enable economic activity. It also establishes, in limited liability companies (LTDA and SA), the limit of the partnership of the partners: each partner is responsible for the obligations of the company to the value of their share in the capital, protecting their personal assets beyond that limit.

How the social capital is constituted and registered

In Brazil, the process of constitution of social capital occurs at the time of creation of the company. The partners define in common agreement the total amount that will be invested and how this amount will be divided between them. This information is formalized in writing in the social contract (in the case of limited companies or individual companies of limited liability) or in the statute (in the case of corporations). In these documents, there are the sum of the capital and the description of the contribution of each partner - for example, how much each contributes to cash or goods, and which percentage of participation this represents. Once prepared, the contract or statute with this information is registered with the State Commercial Board (for Mercantis Companies) or the Civil Registry Office of Legal Entities (for simple companies), making capital officially registered as required by Brazilian law.

It is important to note that, unlike some countries, the Brazilian order does not stipulate a minimum general capital for most types of company (except specific cases, such as financial institutions or old Eireli requirements, currently replaced by SLU - unipessal limited company). In practice, partners are free to determine a value they consider appropriate. Experts recommend calculating capital based on the initial business costs, ensuring sufficient resources for installation and operation expenses in the first months. For example, it is common for small businesses to start with social capital in the range of $ 1,000 to $ 5,000 , which can be adjusted later as needed. Most importantly, capital is clearly defined and fully compromised by the partners when opening the company, meeting the legal requirements and giving credibility to the new business.

Types of Social Capital: Subscribed and Integrated

subscribed capital and the integralized social capital are distinguished . These terms help to understand whether the value promised by the partners has been actually played or not:

• Subscribed Social Capital: corresponds to the amount that the partners are committed to investing in the company. By signing the contract or bylaws, each partner declares the amount (in cash or goods) that will be contributed to compose the capital. This declared amount constitutes the subscribed capital. In short, it is the capital promised by the partners at the time of the formation of society. For example, if three partners subscribe to a total of $ 300,000 (each compromising $ 100,000), this is the company's subscribed capital.
• Integrated Social Capital: represents the portion of the subscribed capital that has already been effectively delivered to the company. integrated capital is considered . This occurs by depositing the money in the company's bank account or transferring property to the company's name. In the previous example, if each partner has already contributed their $ 100,000 as promised, then the $ 300,000 were integrated. As long as there is a difference between the subscribed and the integrated, it is said that there is a part of the capital to be integrated (which partners must still contribute in the future).

Maintaining integrated social capital is important both legally and for the financial health of the business. If a partner fails to integrate the party he has subscribed, the company may face financial imbalance and other partners may charge integralization or take legal action, as the corporate capital declared in a contract presupposes this entry of resources.

Increase and reduction of social capital

The value of social capital is not unchanging during the company's life. As the business evolves, partners may decide to increase or, in rare cases, reduce social capital, following formal procedures.

• Capital Increase: It is the most common way of changing social capital over time. It usually occurs when the company needs new investments to grow, enter new markets or balance their finances. A capital increase can be made by the entry of new partners/investors or additional contributions from current partners, and even by incorporating profits and reserves into capital (in the case of corporations). To make the increase, it is necessary that the initial capital is fully integrated (paid) and then issue an additive to the social contract or a shareholder assembly deliberate the increase, updating the value of the capital. This act must be registered again at the Board of Trade. Capital increase dilutes or reaffirms corporate participation according to the contribution of each partner: those who invest the most quotas or shares. Practical Example: If a startup started with R $ 50,000 of corporate capital and, after one year, receives an investment of R $ 500,000 from a fund, this contribution can be formalized as capital increase, raising capital to R $ 550 thousand and adjusting the participation of the new investor in the corporate framework.
• Capital Reduction: It is already a less common operation, as the law imposes strict conditions to protect creditors. Reduction of social capital can happen, for example, if capital is excessive in relation to the company's object (capital left without need) or to absorb accumulated losses. To reduce, the company needs to be without outstanding debt and must publish notices to creditors, who are entitled to oppose if they feel harmed. It is a slower and more bureaucratic process, often requiring approval in assembly and waiting deadlines after publication in a newspaper. Because of this complexity, reducing capital is rare and usually only used in specific situations (such as corporate restructuring or adjustment after substantial loss of assets). An example: a company with a corporate capital of R $ 1 million and net equity of only R $ 200 thousand (due to losses) could, by legal authorization, formally reduce its capital to R $ 200 thousand, adapting it to the new reality-but only after fulfilling legal protection procedures.

Difference between Social Capital and Equity

There is common confusion between social capital and equity , but they are not synonymous. The net equity (PL) of a company represents the sum of the social capital plus all the results accumulated over time (reserves, retained profits, evaluation adjustments, etc.), deducted the losses. Social capital is only the amount originally invested and eventually adjusted by new contributions or formal reductions.

A key difference is that social capital tends to be a static (only changes when partners formalize a deliberate change), while equity is dynamic , varying according to the success or failure of the business. Social capital does not change in the daily life of the operation; Equity changes with the results: increases with profits (which saw reserves or accumulated) and decreases with losses.

For example, imagine a company that was constituted with social capital of $ 100,000. After a few years of activity, she generated profits and accumulated reserves, having a net equity of $ 300,000. In this case, the share capital could still be registered as $ 100,000 (if there was no formal increases), but net equity tripled due to the gains in the business. The opposite can also occur: it is possible for a company to have high capital and reduced or even negative equity - increased losses greater than the initial contribution. This shows that social capital makes up the assets, but it is not equivalent to it. In terms of financial health, net equity provides a more complete portrait of the company's current “wealth” (less passive assets), while social capital is another indicative of the initial contribution and impairment of the partners.

Does social capital reflect the value of a company?

Not always. The market value or economic value of a company can be very different from its social capital. Social capital represents what was invested by the founders, but the value of a company (whether valued by the market, investors or financial methods) depends on many other factors: financial performance, intangible assets (brand, technology, customer wallet), growth prospects, market position, among others. As highlighted by lawyer William Koga, a business company tends to be financially more than the value expressed by capital, or even the accounting value of its equity , as there are several additional elements that interfere positively or negatively in the value of the company.

In other words, social capital does not directly reflect the current value of a company. It indicates how much the owners put it at the beginning (or in later increases), but does not capture how much the company came to be used after operating. For example, many startups start with modest social capital (sometimes only a few thousand reais), but they can reach a valuation of millions of reais after showing high growth potential and attracting investors. In this case, the market value far surpasses the initially invested capital. On the other hand, there are old companies with high capital social capital, but whose business may have lost value - whether by debt, market loss or obsolete assets - causing, in practice, their sales value or settlement is lower than registered capital.

Social capital and valuation: because it is not the only criterion

From the point of view of Valuation (Business Value Evaluation), Social Capital is only one of the data to consider, and is usually not the main criterion for investors. In assessing a company to invest, analysts use methods such as discounted cash flow, multiple market (for example, comparing price/profit from similar companies) or accounting value, which take into account past results and future business projections. In these methods, what matters are cash flows, profits, actives and expected growth , and not just how much the partners have originally invested.

It is true that a well -sized social capital may indicate that the company had enough resources to start and keep up to make a profit, and denotes the partners' commitment. However, investing wisely requires looking a broader panorama . An investor should analyze indicators such as revenues, profit margin, cash generation, equity, indebtedness, market perspectives and management quality. Social capital enters more as a data data: for example, if it is too low compared to the operation, it can signal need for future contributions or risk of subcapitalization; If it is too high and the return generated is low, it may indicate inefficiency in the use of resources. Ultimately, the valuation of a company seeks to estimate how much it is worth based on its ability to generate wealth in the future, something that goes far beyond the nominal value of capital.