Authorised & Issued Share Capital: Explained

 A share is the interest of a shareholder in a company, measured by a sum of money.

What Is Share Capital?

Share capital is the most common way of determining the ownership of a company. In relation to a company limited by share capital, the share capital will be issued to the shareholders when the company is first set up. However, further share capital can be issued at a later date if necessary.

What Is Authorised Share Capital?

Authorised share capital can be defined as the largest amount of share capital that a company can issue. This amount will be agreed on when the company is being incorporated. Again, this amount can be increased at a later date if the shareholders wish.

The authorised share capital does not all have to be paid. It is the maximum value of the share capital and in some cases much of this value may remain unissued. The authorised share capital does not impose an obligation on the shareholder to pay on the winding up of the company, hence why some see authorised share capital as something of limited importance.  

The authorised share capital will tell you the maximum amount of share capital that the company can have and will set out the nominal value of each share.

The articles of association of the company are important as they outline how much authorised share capital the company can potentially issue if changes need to be made down the line. It is common for companies to increase their share capital and if this change is required there are certain documents which will need to be filled out and submitted to the Corporate Affairs Commission (CAC).

It should also be noted that the authorised share capital can be divided into different share classes such as preferable or redeemable, each of which are subject to different rights.

What Is Issued Share Capital?

The Dictionary of Company Law describes issued share capital as “the nominal value of the shares actually issued.”

Issued share capital is the amount of capital that is actually paid by the shareholders. This will usually be a smaller amount than the authorised share capital and will be taken up by the shareholders of the company for money or another form of consideration.

If a company is winding up, the issued share capital will be the amount of money that the shareholders will be liable for; therefore, the issued share capital will equal the amount of money that the shareholders will owe if all or part of the shares are unpaid.

If the issued share capital has not all been paid up (paid for) when it is issued, i.e. if the shares are partly paid shares, each shareholder will be liable for the amount owed on any share that they hold if the company goes into liquidation.

The Difference between Authorised Share Capital and Issued and Paid up Share Capital

As explained above, 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 Statement of Financial Position (i.e Balance Sheet) for information purposes. It isn’t considered in the totalling of the Statement of Financial Position. The issued and paid up share capital however is accounted for on the company’s Statement of Financial Position 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 N0.50 each. The total amount of authorised share capital for the start-up is therefore N250,000. However, the start-up’s issued capital may only be 50,000 shares, and so they will only have N25,000 in capital. It may seem strange for them not to have maxed their authorised share capital out, as they could have an additional N225,000 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.

'Segun-Martins Ogunyemi, ACA, ACTI | Principal Consultant, Pro Logic Ideas Consulting | URL: prologicideas.com