What is the Difference Between Authorized Capital and Issued Capital?

Authorized capital and issued capital are ways in which a company can raise money through shares. However, these two are different in several ways and still have many similarities. In this article, we will be discussing what is authorized capital and issued capital to help you understand them in detail. 

Table of Contents

• Difference Between Authorized Capital and Issued Capital
• What is Authorized Capital?
• What is Issued Capital?
• Similarities Between Authorized Capital and Issued Capital

Difference Between Authorized Capital and Issued Capital

The main difference between authorized capital and issued capital is that issued capital is a part of authorized capital. While authorized capital is the maximum amount that a company is allowed to raise from public. Issued capital is the part of authorised capital that is offered to public for subscription. Let us now explore more difference between issued capital and authorized capital.

What is Authorized Capital?

Authorised capital refers to the maximum amount of stock units or number of shares a company issues as per its Memorandum of Association MOA or Article of Association AOA. 

It is the total value of shares that a company can offer for sale to its investors. Authorized capital is set by the founders and board of directors of the company. It is then approved by the shareholders. Authorized capital is divided into shares of certain nominal capital. It sets an upper limit on the capital that the company can raise by issuing shares.

Please Note:

• Other names of authorized capital are ‘authorised share capital’, ‘authorized shares’, ‘authorized stocks’ or ‘authorized capital stocks’.
• More authorized capital can only be issued with the approval of shareholders.

Authorized Capital With Example

While setting up a company, one of the first decisions to be made is how many shares will be created and sold to investors. This total number of shares that can be issued is known as the "authorized capital."

Let us say, it is decided that the company can have up to 100,000 shares. Each share represents a tiny piece of the company. Here, authorized capital represents that the company can be divided into 100,000 shares.

Suppose, each share is valued at $1 during the inception of the company. This means the authorized capital amounts to $100,000. It indicates that the company has the potential to raise $100,000 by selling these shares to investors.

What is Issued Capital?

Issued capital is the amount of nominal value of shares held by shareholders. It is the per value of share that is distributed to company's shareholders. The amount invested by shareholders in firm is represented by issued capital or issued share capital. Issued capital may be less than or equal to the authorized capital depending on the number of shares issued by the company.

Please note:

• Issued capital is also known as issued share capital, paid up share capital or subscribed capital. 
• It can be increased with the approval of shareholders when it requires increasing the company's authorized capital.

Issued Capital With Example

Let us say that a company set its authorized capital at 1 million shares. This means that the company has the legal authority to issue shares upto 1 million to its investors.

As the company grows, it will require more funds to finance its expansion projects, it decides to issue shares to the public to raise the necessary capital. The company chooses to issue 500,000 shares out of its 1 million authorized shares. The issued shares are offered at a price of $10 per share. 

In this case, the issued capital is the 500,000 shares that have been actually issued to investors. If all these shares are sold at the set price of $10, the company raises $5 million from the public. This $5 million becomes part of the company's equity financing, used to support its operations, research and development, and expansion activities.

The remaining 500,000 shares (the difference between the authorized capital of 1 million shares and the 500,000 issued shares) remain unissued. The company can issue these shares in the future if it needs to raise more capital.

Similarities Between Authorized Capital and Issued Capital

The following points explain the similarities between authorized capital and issued capital:

• Both represent company capital: Both are related to the amount of money a company can raise through shares.
• Defined in official documents: Both are specified in the company's founding documents like the Memorandum of Association.
• Measured in money: Both are expressed as a monetary value, not just the number of shares.
• Influence shareholder rights: Both impact ownership rights and voting power of shareholders.
• Help assess company's value: Both, along with other financial information, can be used to estimate the overall value of a company.
• Recorded in company's books: Both are included in the company's financial statements such as balance sheet or income statement, providing information about its financial health.