What is Authorized Capital? Example and Related Terms

In Kenya, under the Companies Act, 2015, when a company is formed, it must declare its authorized share capital in the memorandum. Many companies, especially startups, issue only a fraction of their authorized share capital in the early stages to avoid dilution and to leave room for growth. If you’re involved in setting up or running a company, you’ve probably come across the terms authorized share capital and issued share capital. At first glance, they may sound similar, but they represent different aspects of a company’s financial structure. Let’s break it down in a clear, no-nonsense way, focusing on what these terms mean and why they matter—especially in East Africa. The authorised (or nominal) share capital can be considered the maximum share capital the company is authorised to issue (allocate) to shareholders.

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It is an important measure of a company’s financial health and its ability to raise capital, and can fluctuate based on the market value of the shares. By carefully managing its Issued Share Capital, a company can improve its ability to raise additional capital and strengthen its overall financial position. Issued Share Capital is typically recorded on a company’s balance sheet as a liability.

Importance of Share Capital

This is the big number—think of it as the maximum amount of money a company is allowed to raise by issuing shares. The authorized share capital is set in the company’s Memorandum of Association and can be thought of as the ceiling for how many shares a company can issue. The total value of the shares a company elects to sell to investors is called its issued share capital. The par value of the issued share capital cannot exceed the value of the authorized share capital. Some companies—depending on where they are located—can issue investor called-up shares with the promise to be paid in full at a later date. Share capital is reported by a company on its balance sheet in the shareholder’s equity section.

When a company decides to raise funds with capital contribution, it can convert as much of its authorised share capital as it would like into issued share capital by selling shares. Those who receive shares pay money to the company and then become shareholders. Paid-up capital doesn’t have to be repaid and this is a major benefit of funding business operations in this way. Also called paid-in capital, equity capital, or contributed capital, paid-up capital is simply the total amount of money shareholders have paid for shares at the initial issuance. It doesn’t include any amount that investors later pay to purchase shares on the open market.

Understanding Share Capital

Other types of capital, such as debt financing or mezzanine financing, are not considered share capital. Debt capital includes financing sources such as lines of credit, business loans, and credit card balances. While mezzanine financing, like share capital, is included under the equity section of the balance sheet, it is not considered share capital. The money raised from the issuing of stock can be used to pay debts, cover expenses, pay staff and continue operations. Having more capital can also help improve the business’s creditworthiness. Share capital may also denote the number and types of shares that compose a corporation’s share structure.

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1. A company that wants to raise more equity can obtain authorization to issue and sell additional shares, increasing its share capital.
2. Accountants have a much narrower definition and their definition rules on the balance sheets of public companies.
3. It doesn’t include any amount that investors later pay to purchase shares on the open market.
4. This allows the company to be able to issue additional stock at a later point if they suddenly need to raise capital quickly.
5. There are different terms that describe the different types of capital that a company has.
6. At times, the authorised share capital can also be called ‘authorised stock’, ‘authorised shares’, or ‘authorised capital stock’.

This figure represents the potential equity that a company can leverage to raise funds for its operations, expansion, and other financial needs. Share capital refers to the amount of funding a company raises through the sale of stock to public investors. This means the company grants shareholders a small ownership stake in the company in exchange for monetary investment. Share capital constitutes the main source of equity financing and can be generated through the sale of common or preferred shares.

The share capital is the part of what is issued capital a company’s equity that it has raised from issuing common or preferred shares and is different from other types of equity accounts. However, people who are not accountants often include the price of the stock in excess of par value in the calculation of share capital. So, the difference between the par value and the real sale price, called paid-in capital, is usually considerable. Nevertheless, it is not technically included in share capital or capped by authorized capital limits. The maximum amount of share capital a company is allowed to raise is called its authorized capital.

Contributed Surplus is an accounting item that’s created when a company issues shares above their par value or issues shares with no par value. If a company raised $1 million from shares that had a par value of $100,000 it would have a contributed surplus of $900,000. The par value of shares is essentially an arbitrary number, as shares cannot be redeemed for their par value.

1. Share capital is only generated by the initial sale of shares to investors.
2. Many companies, especially startups, issue only a fraction of their authorized share capital in the early stages to avoid dilution and to leave room for growth.
3. The later sales and purchases of those shares and the rise or fall of their prices on the open market have no effect on the company’s share capital.
4. Share capital is only generated by the initial sale of shares by the company to investors.

There are different terms that describe the different types of capital that a company has. CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. CFI is on a mission to enable anyone to be a great financial analyst and have a great career path.

Though this does not limit the number of shares a company may issue, it does put a ceiling on the total amount of money that can be raised by the sale of those shares. Common stock is what most people think of when they talk about the stock market. Common, or ordinary, shareholders have voting rights and participate in major company decisions. Although companies at times pay dividends on common shares, they are not required to pay them. The term ‘authorised share capital’ refers to a company’s capital in the broadest terms possible. It refers to every share the company would be able to issue if it wanted to, or if it became necessary to.