Authorized Capital vs. Paid-Up Capital
- Authorized Capital: The maximum amount of capital a company can legally issue, representing its potential for raising funds.
- Paid-Up Capital: The actual amount of money a company has raised by issuing shares, showing the real investment made by shareholders.
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Authorized capital reflects a company's fundraising potential, while paid-up capital represents the actual financial commitment from shareholders.
Example:
Imagine a tech startup, "FutureTech Inc." Its foundational documents set an authorized capital of $50000, indicating its maximum fundraising potential. Initially, to kickstart operations, it issues shares worth $20000, fully paid for by investors. This $20000 becomes its paid-up capital, the actual funds in hand. Authorized capital represents FutureTech's potential, while paid-up capital reflects its current financial foundation.
Comparative Table: Authorized Capital vs. Paid-Up Capital
| Aspect | Authorized Capital | Paid-Up Capital |
|---|---|---|
| Definition | Maximum share capital a company can legally issue | Actual share capital issued and paid for |
| Legal Documents | Specified in the company's constitutional documents | Reflected in the company's financial statements |
| Purpose | Indicates potential for raising capital | Represents actual capital raised and available for use |
| Changes | Can be altered with shareholder approval | Changes when new shares are issued and fully paid for |
| Impact on Business | Represents growth potential and ability to raise funds in the future | Indicates the amount of shareholder investment and capital available for immediate use |
| Example | A company with an authorized capital of $10 crores can issue shares up to that value | If the company has issued and received payment for shares worth $5 crores, this is its paid-up capital |
What is Authorized Capital?
Authorized capital, also known as authorized share capital or nominal capital, is the maximum amount of share capital that a company is legally allowed to issue to shareholders. It is specified in the company's constitutional documents and can be increased with shareholder approval. This sets a cap on the number of shares a company can offer, determining its potential for raising capital. The actual issued capital may be less than this authorized limit.
Example of Authorized Capital
ABC Company registers its authorized capital as $1 crore. This means the company can issue shares worth up to $1 crore to its shareholders. Initially, they may only issue $50000 worth of shares to raise capital, leaving room to issue more shares up to the $1 crore limit in the future.
What is Paid-Up Capital?
Paid-up capital refers to the amount of cash a company has received from its shareholders in trade for enterprise shares. It represents the funds that shareholders have certainly invested, not simply promised. This capital paperwork part of the organization’s equity and is recorded on the stability sheet. It is different from authorized capital, which is the maximum value of shares a company can legally issue. Paid-up capital is the actual capital raised and available for use in business operations.
Example of Paid-Up Capital
Consider a startup, "GreenTech Innovations," authorized to issue shares worth $50000. To start operations, it issues 10,000 shares at $100 each. Investors buy all these shares. The total money GreenTech receives from these shareholders is $10000 (10,000 shares x $100 per share). This $10000 is GreenTech's paid-up capital, representing the company's actual investment to be used and recorded in its financial statements.
Difference Between Authorized Capital and Paid-Up Capital
- Definition: Authorized capital is the maximum amount of share capital a company is allowed to issue, while paid-up capital is the actual amount of share capital issued and paid for by shareholders.
- Legal Status: Authorized capital is outlined in the company's constitution and represents potential capital, whereas paid-up capital is actual capital reflected in the company’s financial statements.
- Purpose: Authorized capital sets a limit for potential fundraising and share issuance, whereas paid-up capital indicates the level of shareholder investment already made.
- Flexibility: Authorized capital can be increased or decreased with shareholder approval and legal processes, while paid-up capital changes only when new shares are issued or existing shares are fully paid.
- Impact on Company Valuation: Authorized capital indicates a company’s future potential to raise funds, while paid-up capital measures the funds currently at the company’s disposal.
- Risk and Liability: Authorized capital has no direct financial liability until issued; paid-up capital, once received, is a liability in terms of dividend payments and represents actual financial commitment by shareholders.
Understanding the differences between authorized and paid-up capital is crucial for accurate financial management and strategic planning in any business.