Published Apr 5, 2024 Authorized capital, also known as authorized share capital or nominal capital, refers to the maximum amount of share capital that a company is authorized by its corporate charter to issue to shareholders. It is a fixed amount, stated in the company’s articles of association or its constitution, and can only be changed with the approval of the shareholders through a voting process. The authorized capital represents the upper boundary of equity a company can raise through the sale of its shares. Consider XYZ Corporation, which has an authorized capital of $5 million. This means XYZ Corporation can issue shares up to a value of $5 million to raise funds. At the company’s inception, it may decide to issue $2 million worth of shares to its founders and early investors, leaving it with the potential to raise an additional $3 million in equity from new shareholders in the future without needing to alter its authorized capital. As the company grows, XYZ Corporation might find that it needs more capital than the remaining $3 million authorized. To facilitate this, the company’s shareholders can vote to increase the authorized capital to a higher value, thus providing the company with the ability to issue more shares to raise further capital. Authorized capital is a critical aspect of a company’s financial and strategic planning. It sets a limit on how much money a company can generate through the sale of shares, thereby impacting its potential for growth and expansion. Companies with higher authorized capital can more easily raise significant amounts of equity financing without the need for frequent shareholder approvals to increase capital limits. Furthermore, the amount of authorized but unissued capital (the difference between authorized capital and the capital already issued to shareholders) gives companies flexibility in financing operations, pursuing new business opportunities, or incentivizing employees through stock options without needing to seek immediate shareholder permission. A company cannot issue shares beyond its authorized capital. Doing so would be illegal and a breach of the company’s charter. If a company needs to issue more shares than its authorized capital allows, it must first amend its articles of association or corporate charter to increase the authorized capital, subject to approval by its shareholders. Authorized capital is the maximum amount of share capital that a company is allowed to issue to its shareholders as stated in its corporate charter. Issued capital refers to the portion of authorized capital that has been offered and issued to shareholders. Paid-up capital is the amount of issued capital for which shareholders have paid the company. Not all issued capital may be fully paid-up if some shares have been issued with deferred payment terms. The amount of authorized capital itself does not directly affect a company’s valuation; however, it indicates the potential for equity financing a company can pursue, which could impact its growth prospects and, therefore, its valuation in the long term. Investors and analysts might also view a company’s capital structure, including its authorized, issued, and paid-up capital, as factors in assessing its financial health and strategy. The strategic planning of authorized capital is crucial for a company’s lifecycle, providing a foundation for initial and ongoing financing, setting a framework for shareholder equity, and enabling flexibility in corporate financing strategies. It is a fundamental aspect of corporate governance, requiring careful consideration by founders and management to balance growth aspirations with practical financial and legal constraints.Definition of Authorized Capital
Example
Why Authorized Capital Matters
Frequently Asked Questions (FAQ)
What happens if a company issues shares beyond its authorized capital?
How is authorized capital different from issued capital and paid-up capital?
Does the amount of authorized capital affect a company’s valuation?
Economics