What is Authorized Capital
The maximum number of shares a private limited company can issue is decided by its authorized capital. To issue new shares or to raise the capital, the capital clause of the Memorandum of Association must be amended by passing a special resolution of the board.
Purpose of Authorized Capital
The authorized capital of a Company states the number of shares a Company can issue to its shareholders. Increase in authorized capital might be required for issuing new shares and/or inducing more capital into the Company. In relation to a company, certain amount is mentioned in the capital clause of the Memorandum of Association of the company. Up to this amount the company can raise capital. If the company needs more capital then the capital clause has to be amended by passing a special resolution at a meeting by the members.
Authorized Capital and Paid-up Capital
| Authorized Capital | Paid-up Capital |
| It is the maximum amount of capital for which shares can be issued. | It is the amount of money for which the shares of the company have been issued and the payment has been made by the shareholders. |
| The amount of authorized share capital is mentioned in the Memorandum of Understanding (MOU) of the Company. | The paid-up capital is ether less than or equal to the authorized capital of the company. |
| The authorized capital can be altered only after following the procedure provided by law which involves the approval of the shareholders and an additional fee being paid to the Registrar of Companies (ROC) | Any changes in the authorized capital needs the post facto information to be provided to the ROC. |
Advantages of Share Capital
- No Repayment Requirement
- Lower Risk
- Bringing in Equity Partners
Disadvantage of Share Capital
- Ownership Dilution
- Disadvantage: Higher Cost
- Disadvantage: Time and Effort.
FAQ
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What is the limit of authorized capital?
No Maximum Limit
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Can authorized capital be zero?
Authorized capital is decided at the will of shareholders. No minimum value prescribed under law. Companies can be set up at Nil.
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How do you calculate paid up capital?
If the shares are sold for ₹15 each, then the paid-up capital would be ₹1500.
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What is minimum paid up capital?
1 lakh is still a requirement for forming a Private Limited Company. So, as of 2015, there is no longer a minimum paid up capital for Private Limited company in India. However, an authorized capital of Rs. 1 lakh is still a prerequisite for the formation of such a company
