Definition of Authorized Capital and Paid-up Capital
Authorized capital is the maximum amount of capital for which a company can issue shares to the shareholders, while Paid-up capital is the amount received from shareholders for the shares held by them. Authorized capital is always greater than paid-up capital.
Some of the features of authorized capital and paid-up capital and see how the two are different.
Features or Characteristics of Authorized Capital: The features of this are listed below:
- It is used to describe a company’s capital.
- A company does not generally issue the total amount of its authorized capital shares as some of them are held back for future use.
- It consists of all the shares of every type that the company can issue.
- A company cannot increase its authorized capital without the approval of shareholders.
- It is to be mentioned in the Capital Clause of MoA (Memorandum of Association).
Features or characteristics of paid-up capital:
- There is no minimum amount for the paid-up capital of a company.
- Paid-up Capital is equity which is permanent capital.
- Paid- Up Capital is often referred to as equity capital.
- On the balance sheet Paid- Up Capital comes under stockholder’s equity.
- Paid-up capital is less or equal to the authorized capital.
- It is also mentioned in the capital clause of MoA (Memorandum of Association).
Allocations/Implications/Applications: Authorized capital is the maximum amount for which a company can issue its shares. Paid-up capital is the actual amount received from shareholders.
- The company’s constitutional documents Capital –Authorized capital and hence need not be calculated. It is the capital that is allocated at the starting of the company.
- Paid-Up Capital- The following steps are involved in calculations of Paid-up Capital-
- Find out the number of equity shares issued by the company and the portion of the face value of the share called up.
- Multiply them to calculate the paid-up capital of the company.
- Paid-up capital= No. of Equity Share Issued * called up the value of the share.
Difference between authorized capital vs. paid-up capital
- Maximum capital or shares that can be issued to the shareholders is known as authorized capital whereas; a Paid-up Share Capital is the amount of money received from the shareholders for the shares allocated to them.
- The Authorized Share Capital should always be higher than Paid-Up Share Capital.
- The Authorized Share Capital can be increased with the permission of the shareholders, but for paid-up, the capital company has to raise equity from the market or internal sources
- The Authorized Share Capital should be made public while this is generally not a restriction in Paid-Up Capital.
To conclude, the authorized capital comprises the total shares that any company can issue, whereas paid-up capital comprises the amount received by the company based on the shares issued. A company can change its authorized capital only by meeting specific requirements stated and by the shareholders’ approval, whereas the primary market drives paid-up capital. At any point in time, the company’s paid-up capital cannot exceed its authorized capital.