Difference Between Authorised Capital and Paid-Up Capital

Authorized capital is the maximum amount of capital a company can legally issue, representing its potential for raising funds. In contrast, paid-up capital is the actual amount of money a company has raised by issuing shares, showing the real investment made by shareholders. The former indicates potential, while the latter reflects actual financial commitment. 

Imagine a budding tech startup, "FutureTech Inc.," planning its financial journey. Its foundational documents set an authorized capital of ₹50 lakh, akin to its maximum fundraising potential. Initially, to kickstart operations, it issues shares worth ₹20 lakh, which investors fully pay for. This ₹20 lakh becomes its paid-up capital, the actual funds in hand. Here, the authorized capital represents FutureTech's fundraising capacity, while paid-up capital reflects its current financial grounding.

Table of Content

• Comparative Table: Authorised Capital vs Paid-Up Capital
• What is Authorised Capital?
• What is Paid-Up Capital?
• Difference Between Authorised Capital and Paid-Up Capital

Comparative Table: Authorised Capital vs Paid-Up Capital

What is Authorised Capital?

Authorized Capital, is often referred to as Authorized Share Capital or Nominal Capital. It is the maximum amount of share capital that a company is legally allowed to issue to shareholders. It's specified in the company's constitutional documents and can be increased with shareholder approval. Essentially, it's like a cap set on how many shares a company can offer, determining the potential for raising capital. However, the actual issued capital might be less than this authorized limit. The company cannot raise more than the amount of capital as specified in the Memorandum of Association. The authorised capital can be increased or decreased according to the procedure laid down by the Companies Act. 

Example of Authorised Capital

ABC company registers their authorised capital as ₹1 crore. This implies that the company can issue shares worth up to ₹1 crore to its shareholders. Initially, they might only issue ₹50 lakhs worth of shares to raise capital. It leaves room to issue more shares up to the ₹1 crore limit in the future as the company grows or requires more funding.

What is Paid-Up Capital?

Paid-up capital refers to the amount of money a company has received from its shareholders in exchange for company shares. It represents the funds that shareholders have actually invested, not just promised. This capital forms part of the company’s equity and is recorded on the balance sheet. It differs from authorized capital, which is the maximum value of shares a company can legally issue. It may be called 'calls in arrears' if any shareholder has not paid the amount on calls. As a result, the paid-up capital equals the called-up capital minus the call-in arrears.

Example of Paid-Up Capital

Imagine a startup, "GreenTech Innovations," authorized to issue shares worth ₹50 lakh. To start operations, it issues 10,000 shares at ₹100 each. Investors buy all these shares. The total money GreenTech receives from these shareholders is ₹10 lakh (10,000 shares x ₹100 per share). This ₹10 lakh is GreenTech's paid-up capital. It's the company's actual funding for use, a part of its equity, and is recorded in its financial statements. The remaining ₹40 lakh of authorized capital remains unissued. 

Difference Between Authorised Capital and Paid-Up Capital

Definition: Authorized Capital is the maximum amount of share capital that a company is authorized to issue, while Paid-Up Capital is the actual amount of share capital issued and paid for by shareholders.

Legal Status: Authorized Capital is outlined in the company's charter and represents potential capital, whereas Paid-Up Capital is actual capital that is reflected in the company’s financial statements.

Purpose: Authorized Capital sets a limit for potential fundraising and share issuance, whereas Paid-Up Capital shows the extent of shareholder investment already made.

Flexibility: The Authorized Capital can be increased or decreased with shareholder approval and legal procedures, whereas Paid-Up Capital changes only when new shares are issued or existing shares are fully paid.

Impact on Company Valuation: Authorized Capital indicates a company's future capacity to raise funds, while Paid-Up Capital is a measure of the funds currently at the company's disposal.

Risk and Liability: Authorized Capital has no direct financial liability until issued; Paid-Up Capital, once received, is a liability in terms of dividend payments and represents actual financial commitment by shareholders.