Key Takeaways
- Definition and Purpose: Authorized capital, also known as authorized shares or registered capital, represents the maximum amount of capital that a company is legally allowed to issue or sell to shareholders. Issued capital, on the other hand, refers to the portion of authorized capital that has been actually issued and sold to shareholders.
- Flexibility and Future Expansion: Authorized capital provides flexibility for a company to issue more shares in the future without the need to amend its charter. Issued capital represents the shares that are already in circulation and owned by investors.
- Legal and Financial Implications: Authorized capital sets the upper limit for potential share issuance, while issued capital represents the actual ownership in the company. Issuing shares beyond the issued capital requires shareholder approval and can dilute the ownership of existing shareholders.
What is Authorized Capital?
Authorized capital, also called registered or nominal capital, is the largest amount of capital an employer is legally authorized to issue to its shareholders. It is a crucial issue of an enterprise’s capital shape and is set up at incorporation.
This determination is printed in the company’s Memorandum of Association and represents the top limit for fundraising via percentage issuance. Altering the legal capital calls for approval from shareholders and might contain felony processes.
While it offers flexibility for future boom and enlargement, it no longer directly impacts current shareholders’ rights. It serves as a shield for lenders and buyers, indicating the most liability of shareholders in the event of liquidation or finishing up.
What is Issued Capital?
Issued capital refers to the portion of authorized capital that a business enterprise has truly allotted and issued to its shareholders. It represents the tangible finances the enterprise has raised by selling shares.
This capital is important for a corporation’s operations because it offers the financial assets for everyday activities, investments, and growth efforts. Capital issuance dilutes the ownership stakes of present shareholders, as they now hold a smaller share of the business enterprise.
Unlike legal capital, which sets the most limits, issued capital directly affects the business enterprise’s economic role and is disclosed in its financial statements, including the balance sheet. It reflects the financial strength and sources for the corporation’s commercial enterprise endeavours.
Difference Between Authorized Capital and Issued Capital
- Authorized Capital is the capital a company can legally issue to its shareholders. On the other hand, the Issued Capital is defined as the amount of money a company has issued to its shareholders.
- Authorized Capital is determined at the time of incorporation, which can be changed from shareholders’ approval. At the same time, the Issued Capital is determined by the board of directors of the company while keeping in mind about the limit of authorized capital.
- The purpose of Authorized Capital is to depict the maximum capital raised by a company from its shareholders. While on the other hand, the purpose of Issued Capital is to depict the actual amount of capital raised by the company from its shareholders.
- In Authorized Capital, there is no certain impact on the shareholder’s rights. Whereas on the other hand, Issued Capital may dilute the ownership of the shareholder when the company issues new shares.
- Authorized Capital mentions the reporting requirement in the company’s Memorandum of Association and financial reports. Comparatively, on the other hand, Issued Capital is represented in the company’s balance sheet.
Comparison Between Authorized Capital and Issued Capital
| Parameter of Comparison | Authorized Capital | Issued Capital |
|---|---|---|
| Definition | The amount of capital a company is able to issue legally to its shareholders | The amount of capital a company has issued to its shareholders |
| Determined By | At the time of incorporation, which can be changed from the approval of shareholders | The board of directors sets the limit while keeping in mind the authorized capital |
| Purpose | It depicts the maximum capital raised by a company from its shareholders | It depicts the actual amount of capital raised by the company from its shareholders |
| Impact on Shareholder’s Rights | It doesn’t have any impact on shareholder’s rights | The amount of capital a company can issue legally to its shareholders |
| Reporting Requirement | These are mentioned in the company’s Memorandum of Association and even in financial reports | They are represented in the balance sheet of the company |
