What is Authorized Capital, Issued Capital and Paid Up Capital?

If you want to start a private limited company then you will hear some terms: authorized capital, Issued capital and Paid-up capital. What is authorized capital, what is issued capital and what is paid-up capital? So see, when you want to start a business then these terms get very confusing. And you may wonder why this type of complex structure is made. See, it's not at all a complex structure. We make it complex all on our own. Everything has a reason. I will tell you what it is. In this post, we will understand this in detail.

What is Authorized Capital, Issued Capital and Paid-up Capital

Authorized Capital

Let's talk about authorized capital. See, whenever you establish a private limited company then you have to issue shares in that. All the promoters or owners will invest the amount, 5 lacs, 10 lacs whatever the minimum amount they want to invest. The shares are issued to them against that money. So now, how many shares will be issued? This is decided by authorized capital or issued capital. We will understand this a bit. What is an authorized capital? Any company which issues a maximum number of shares. This is decided by authorized capital. For example, the maximum authorized shares of any company are 1 lakh. So the value of every share is 10 Rs. So the authorized capital of any company will be 10 lakh. Any company whose authorized capital is 10 lakh and the value of each share is 10 Rs. It cannot issue shares of more than 1 lakh. If the company wants to issue shares of more than 1 lakh. Then, it will need the approval of the government. Now let's talk about issued capital and paid-up capital.

Issued Capital and Paid-up Capital

Assume the promoters have kept the authorized capital as 10 lakh Rs. The promoter says that 6 lakhs will work for us. We don't want to issue all the shares at once. We will issue 60,000 shares and we will invest 6 lakh Rs. So, 60000 shares ×10 (the value of one share is 10) So they have invested 6 lakh Rs. So this value will be your issued capital. Because 60000 shares are already issued to the promoters. So issued capital, 60% shares are already issued. Because this money is already invested in the company. That's why we can also call it a paid-up capital. So see, the issued capital and paid capital is the same here. But if there is a public limited company and the money is raised from the stock exchange or the money is raised through IPO, then there can be a difference between these two.

But if we say generally to understand in a simple language. So whenever we start a new company then issued capital and paid-up capital is the same. Whatever you have invested initially. And the shares issued against that money will be your issued capital or paid-up capital. So the remaining 40000 shares left. See, you have invested Rs 6 lakhs in the company. So why are these 40000 shares left and what is the benefit of this? Why not purchase the shares of 10 lakhs by yourself? There is a reason for that also. What is the reason? We keep this for future investments. If you want to raise money in the future. So you leave some shares for that. Whoever will be the new investor, will invest money then you can issue these shares to them. So see, understand the second case. If you have issued all the shares to yourself. This was paid-up capital and you have invested 10 lakhs in the company. So in that case, if you would have to raise investment in the future.

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So you would have to increase authorized capital. When we increase authorized capital, we need the approval of shareholders and we have to pay the government fees. So the process becomes a little cumbersome. So whenever you start a company. Then don't do it with 100% paid-up capital. If you want to raise investment in the future. If your company is profitable and if you think that you will be its owner forever. Then you can do 100% paid-up capital. Otherwise, if you want to raise any investment in the future then you should keep some unissued capital for that. This means that is not paid up, what do we call it? We call it unissued capital because you haven't issued it. The company has these shares. So see, a question that arises here is that. Whenever I issue these shares then I can raise an investment of a maximum of 4 lakhs? No, it's not like that. See, this Rs10 is only face value. So when you raise an investment then you will not sell these shares at Rs10. Its market value could be anything. So what is the difference between market value and face value? And with that, what is the difference between book value? I have already made a detailed post on this. You can read that post.

Also Read, What is Book Value, Market Value and Face Value? Comparison Between Book and Market Value.

So you can sell these 40000 shares at Rs1000 instead of Rs10. You can also sell it for Rs10000. Its value could be anything. It depends on the valuation of your business. But face value will always remain the same. Unless it is being changed by writing. I hope by reading this post, you understood the difference between issued capital, paid-up capital, and authorized capital. So if you want to start a business in which you will keep 100% ownership to yourself. Then you can go with 100% paid-up capital. If you want to start a business where you will have to raise an investment in the future, in that case, you should keep some unissued capital. If you have any suggestions or you want to suggest any topic for future posts. Then comment below.