Authorised share capital – What is authorised share capital?
Authorised share capital is the maximum amount of capital that a company can issue to stakeholders as agreed in its articles of association. At times, the authorised share capital can also be called ‘authorised stock’, ‘authorised shares’, or ‘authorised capital stock’.
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It isn’t possible to raise shares to shareholders beyond the authorised share capital of a company. Therefore, companies are commonly registered with capital which goes way beyond their current financing needs and it isn’t completely used by management. This allows the company to be able to issue additional stock at a later point if they suddenly need to raise capital quickly.
The difference between authorised share capital and issued and paid up share capital
There are different terms that describe the different types of capital that a company has. 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.The authorised share capital is set by the company’s shareholders and it can only be increased with their approval.
The ‘issued capital’ and ‘paid-up capital’ is the proportion of the authorised share capital that has actually been raised by issuing shares to shareholders, and for which full payment of the shares has been made by the shareholders to the company. 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.
The authorised share capital is therefore the maximum amount of funding that can be raised by issuing company shares. The issued and paid up share capital then refers to the amount of investment shareholders have made in the company.
Accounting for authorised share capital and issued and paid up share capital
The authorised share capital does not have any monetary impact on the company until it’s issued. Therefore, it does not need to be recorded in the company’s bookkeeping. However, the issued and paid up share capital needs to be accounted for in the company’s books. This is because the selling of shares has had an immediate monetary impact on the company finances: the company has received money.
The authorised share capital of a company is only reported on the balance sheet for information purposes. It isn’t considered in the totalling of the balance sheet. The issued and paid up share capital however is accounted for on the company’s balance sheet and is considered in its totalling.
An example of authorised share capital
Imagine that you have a company which has an authorised share capital of 500,000 shares, all valued at £0.50 each. The total amount of authorised share capital for the start-up is therefore £250,000. However, the start-up’s issued capital may only be 50,000 shares, and so they will only have £25,000 in capital. It may seem strange for them not to have maxed their authorised share capital out, as they could have an additional £225,000 in capital. But, it’s actually sensible not to do this.
By keeping the shares in the company treasury, the company retains the controlling interest in the business. If the company was to sell all of these shares, then the shareholders would have more influence over the decisions the company makes.
Moreover, if this company was a start-up for example, by keeping the authorised share capital high while the actual issued capital remains low may allow for additional financing rounds from investors. Once again, shareholder approval may not be given if the company has already split stock. If however, the company has held a lot of its stock back, it won’t need to get shareholder approval to go for further funding. If it was then unsuccessful, it still has additional authorised capital it could potentially issue in the future to raise money.