The business definition of authorized capital is seen as being a cap on the number of shares that can be issued by a company. When participating in an initial public offering (IPO) or other offering of stock, a company typically won’t offer its maximum authorized capital. Company management often leaves room to issue additional stock in the future in case the company needs to raise capital. Companies also hold shares back from being offered to retain a controlling interest in the business.
Authorized capital is the broadest term used to describe how a company can raise money. The authorized capital definition is intentionally expansive. The meaning of authorized capital encompases several sub-categories of ways of company is capitalized. We’ll explain how the concepts of “subscribed capital,” “paid-up capital,” and “issued capital” all help flesh out the definition of authorized capital.
Subscribed capital is authorized capital that potential shareholders have agreed to purchase from the company. Typically, these shares are part of the company’s IPO. Most commonly, these shares have been subscribed to by banks and institutional investors.
Paid-up capital is a term for subscribed capital that investors have paid in-full for. It’s important to note that when investors turn around and sell their shares to other investors, it doesn’t create more paid-up capital. When that happens, the investors who sold their shares receive the proceeds and not the company.
Issued capital refers to shares that have been issued by the company to its shareholders. Shareholders can include public investors, institutional investors, and company insiders who might receive stock as part of their compensation packages. Another term for this type of authorized capital is “outstanding shares” or “shares outstanding.”
Choosing the right amount of authorized capital is both an art and a science. Some stock exchanges have minimum requirements for the amount of authorized capital a company must have to list on that exchange. The London Stock Exchange (LSE) requires listing companies to have at least £700,000 of authorized capital. Other exchanges have similar requirements. Hence, companies need to be thoughtful about how much authorized capital they issue in their charter or articles.
A company’s shares outstanding will fluctuate as it buys back or issues more shares. However, a company’s authorized capital won’t increase without a dilutive measure like a stock split. It’s important to note that authorized capital is set by the shareholders at the time the company forms. Therefore, it can only be increased with their approval.
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Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.