One of the things you are required to have to run a business is Capital. What is it? Capital is the financial asset you need to produce goods and services for your customers. It’s the financial foundation of any business entity without which, it’s nigh impossible to run a business.
However, for business entities such as a private limited company, capital has been categorized in two parts: authorized capital and paid up capital. While their definitions should be self-explanatory, the persons responsible for defining them have made it so that only the legal and financial professionals are capable to grasp their true meaning. Therefore, through this article, we are attempting to empower you with the understanding of the difference between them.
What is share capital?
Let’s first define share capital. See, a company raises funds by issuing shares to the directors/members involved. In return of these shares, the members have to invest money. The total money invested in return of shares is known as share capital.
Authorized capital and paid up capital are two different types of share capital.
What is authorized capital?
Take the example of an authorized capital for a private limited company. The authorized capital in a private limited company is the maximum shares the company is authorized to issue to the shareholders. To put it simple, it’s the maximum amount of value of shares a company is allowed to issue to a shareholder. The organization can never go above that limit.
It’s necessary for a private limited company to mention its authorized capital in the Memorandum of Association. While mentioning it, that information can be divided into:
- Issued capital
- Paid up capital
- Uncalled Capital
What is paid up capital?
The paid up capital in a private limited company is the amount funded by the shareholder. It’s the money the company has received in return of the authorized capital. Consider an authorized capital as a product, then the paid up capital is the amount paid for that product.
Therefore, the paid up capital can never be more than the authorized capital (you won’t pay hundred rupees for buying a 12 bananas worth 60 rupees, would you?). The paid up capital is important, it’s the reaffirmation that the company is being funded and has value in the market.
To conclude, the difference between authorized capital and paid-up share capital is this. The authorized capital is the maximum value assigned to the shares and the maximum authorized amount of shares the company is authorized to issue. The paid up capital is the money that the company gets in return of issuing the shares. I hope that it’s understandable to you now. If you’re still confused, our experts are standing ready to dim it for you. Just contact them and start your business today.