Last editedDec 20212 min read
If you’re the owner of a publicly traded company, an investor, or both, you’ve likely come across the term paid-up capital. Also known as paid-in capital or contributed capital, the term is used to describe the amount of money that the company has received from shareholders in exchange for stock.
This revenue stream is created when a company sells its shares directly to investors on the primary market. This is usually done via an Initial Public Offering (IPO). These shares can then be bought and sold between traders on the secondary market. However, no paid-up capital is generated here as none of the money makes its way to the issuing company.
Paid-up capital: How it works
Paid-up capital comes from two sources – the face value of the stocks, and any excess capital paid on top.
The face value (or par value) is the base price issued by the company. This is usually very low and does not necessarily reflect the market value of the shares in real terms. This value is listed as common stock on the shareholder equity section of the company’s balance sheet.
Excess capital is the money that investors pay on top of the stock’s face value. So, if a company were to release 100 stocks with a face value of £1 and sell them for £20 each, it would report £2,000 in paid-up capital on its balance sheet. This would consist of £100 in common stock and £1,900 in excess.
What is authorised share capital?
Authorised share capital refers to how much capital a company is authorised to issue by its shareholders. This limits the number of stocks that can be issued and the amount of capital that can be raised.
In the US, companies are required to register with the Securities and Exchange Commission (SEC) before issuing an IPO and businesses must request permission before raising capital in this way.
In the UK, the Companies Act 2006 abolished the legal requirement for companies to have an authorised share capital. However, shareholders that wish to restrict the number of shares issued can address this internally in the company's articles. Authorised share capital is typically much higher than the amount that needs to be raised in real terms. This allows companies to sell shares quickly if they need to raise further equity.
Why is paid-up capital important for businesses?
All businesses find themselves needing to raise additional equity from time to time. They may need to raise funds to cover operational costs that are higher than projected or invest in creating an infrastructure for growth.
Increasing paid-up capital enables businesses to generate capital without the need for borrowing. Where there is borrowing, there is interest. And over time interest can eat away at your profit margins and prolong your company’s debt.
In the UK, companies face no restrictions on the level of paid-up capital they can raise, although shareholders may want to impose limits on this. It affords them an opportunity to raise capital without increasing their debt obligation or bottleneck their future profits.
Ascertaining the extent of your company's paid-up capital also provides you (and outsiders) with a clear idea of how much you’re reliant on equity financing to fund your operations and growth.
Analysts will often compare this figure with your company’s level of debt obligation to ascertain your debt ratio and thus quantify its financial health.