No matter the company’s size, nature of business, or other factors, its share capital may be categorized into three types, namely, the authorized capital, subscribed capital, and paid up capital. These three types of capital in a company have different values and purposes. They are extremely important from the perspective of business operations conducted by a company.
Table of Content
In this blog, we have discussed two of the three types of capital, namely, authorized capital and paid up capital. Drawing a crystal clear distinction between the two, we have tried to explain both these types of capital through all the relevant aspects.
What is Authorized Capital?
Authorized share capital, sometimes referred to as registered capital or nominal capital, is the least amount of capital that a company needs for smooth functioning. This sum is determined during the formation and incorporation of the company. The authorized capital is the amount that the company targets to raise as funds by selling its equity shares.
The authorized capital of a company may be increased in the future by passing a resolution to that effect in the general meeting of shareholders.However, once it is fixed, the company cannot issue shares or raise funds exceeding this value. In other words, it restricts the maximum number of shares that a company can issue.
For instance, if XYZ Pvt Ltd Company has an authorized capital of Rs. 20 lakhs and shares have already been issued for the worth of Rs 15 lakhs by the company, it means that the shares have not been issued in excess of the company’s authorized capital, and it is still permitted to issue more shares upto the worth of Rs. 5 lakhs. Now, if the company wishes to issue more shares exceeding the Rs5 lakhs limit, it can do so only after raising the authorized capital of the company.
| S. No. | Authorized Capital of a Company |
|---|---|
|
1 |
The authorized capital must be decided before the company gets formed
|
|
2 |
The government fees charged by the Registrar of Companies (RoC) for incorporating a company depends on its authorized capital.
|
|
3 |
The Memorandum of a company must specify its authorized capital.
|
|
4 |
The authorized capital of a company can be increased in the manner prescribed under law.
|
|
5 |
A company can only issue shares of worth less than or equal to
|
What is Paid up Share Capital?
The amount of capital that the company has received as payment over the shares it has sold to its shareholders is known as the paid up share capital of the company. A company receives paid up capital only after it sells its shares to its shareholders.
The paid up capital of a company can neither exceed its authorized capital, nor its subscribed capital.
| S. No. | Paid up capital of a company |
|---|---|
|
1 |
It is the amount of capital actually paid by the shareholders to the company.
|
|
2 |
A company cannot remain without a paid up capital beyond 60 days after the incorporation of the company.
|
|
3 |
Paid up capital cannot exceed authorized capital and subscribed capital of a company
|
|
4 |
Paid up capital is used for conducting daily business activities.
|
|
5 |
The paid up capital of a company is also its net worth.
|
Have Questions?
Our Startup Advisors are here to help! Give a call or chat with us
We are available 10 AM to 6 PM (Monday to Saturday)
Difference between Authorized Capital and Paid-up Share Capital
The authorized capital and paid up capital of a company have distinct purposes. While authorized capital is considered as the target capital or fund that the company wants to raise for the business to run properly in its initial stages, it is the paid up capital that is actually used for the advancement of the business. In the table below, we have drawn a clear distinction between the two types of capital based on a number of parameters.
| Parameters | Authorized Capital | Paid-up Share Capital |
|---|---|---|
|
Definition |
Authorized Capital is the maximum worth of shares that a company can issue.
|
Paid-up Share Capital is the amount that Shareholders have paid to the company for the shares that bought.
|
|
Documented |
Mentioned in the Memorandum of Association of the company
|
Mentioned in the Memorandum of the company
|
|
Net Worth |
The net worth of the firm or company is not determined by this capital.
|
The paid up capital is the net worth of the company.
|
|
Minimum value prescribed |
The minimum value of authorized capital that a company must have is prescribed by Companies Act, 2013
|
The minimum value of paid up capital that a company must have is prescribed by Companies Act, 2013
|
|
Restriction in selling shares
|
A company is not permitted to issue more shares than its authorized capital.
|
The paid-up capital of a company cannot exceed its subscribed and authorized capital
|
What is the minimum capital needed to register a business?
A minimum prescribed limit for authorized capital and paid-up capital of a company was eliminated by the Companies (Amendment) Act, 2015. The funding of the company should be sufficient to support its business operations, especially, in its initial phases.
Please be aware that a corporation can only finance its operations through investment received from the shareholders, credit received from third parties, and revenue generated from the sale of goods and services.
The activities of the companies place restrictions on loans made by or to directors or members of their families. We advise you to create a small budget for the prospective business and then determine the appropriate capital requirements for your enterprise.
Can I subsequently raise the company's authorized capital?
Yes. The company’s authorized capital may be increased whenever necessary to meet business needs. Note that there is a process that must be followed for raising the authorized capital of a company. Also, raising the authorized capital of a company requires the approval of all shareholders of a company.
Conclusion
The two most relevant components of a company’s capital structure are authorized capital and paid-up capital. A company’s authorized capital is the maximum worth of shares it can issue to shareholders, while, the paid-up capital is the payment made by the shareholders for the shares they have subscribed to.
