Authorised Capital
Definition:
Authorised capital is the maximum amount of capital that a company is legally authorized to raise. It is typically stated in the company’s charter or articles of association. The authorised capital is used as a reference point for determining the company’s authorized share capital and the maximum amount of debt that it can raise.
Key Points:
- Legal limit: The authorised capital is a legal limit established by the company’s charter or articles of association.
- Reference point: It is used as a reference point for determining the company’s authorized share capital and the maximum amount of debt that it can raise.
- Company’s capacity: The authorised capital determines the company’s capacity to raise capital.
- Increase with shareholder approval: The company’s authorized capital can be increased with shareholder approval.
- Common law: In common law countries, the authorised capital is often referred to as the company’s “capital clause.
Formula:
Authorised Capital = Share Capital + Reserves and Surplus
where:
- Share Capital: The company’s authorized share capital.
- Reserves and Surplus: The company’s reserves and surplus.
Example:
A company has an authorized capital of $100,000. This means that the company is authorized to raise a maximum of $100,000 in capital. The company’s issued share capital is $50,000, so there is $50,000 remaining in authorized but unissued capital.
Additional Notes:
- The authorised capital is a flexible figure and can be adjusted over time through shareholder approval.
- The authorised capital is not necessarily the same as the company’s issued capital or paid-up capital.
- The authorised capital is an important corporate financial statement item that provides information about the company’s capacity to raise capital.
FAQs
What is authorized capital?
Authorized capital is the maximum amount of share capital that a company is legally allowed to issue to shareholders, as stated in its incorporation documents.
What is an example of authorized share capital?
If a companyโs authorized capital is โน10,00,000, it means the company can issue shares worth up to โน10,00,000, but not more than that unless it increases the authorized capital.
What is the difference between authorized capital and paid-up capital?
Authorized capital is the maximum amount a company can issue, while paid-up capital is the actual amount of capital that has been issued and paid by shareholders.
Who decides the amount of authorized capital?
The amount of authorized capital is decided by the companyโs founders or board of directors and is specified in the company’s incorporation documents.
How to check the authorized capital of a company?
The authorized capital of a company can be checked in the companyโs incorporation documents or by accessing public records, like those available with a corporate regulatory authority.
