Definition
Authorized capital, also known as registered capital, refers to the maximum amount of share capital that a company can issue legally to its shareholders. It’s established in the company’s constitution or articles of incorporation. The company cannot raise capital from share issuance beyond the authorized capital without authorization from shareholders.
Key Takeaways
- Authorized Capital refers to the maximum amount of capital that a company can issue to shareholders. It is a figure that is set by the company and approved by shareholders and can serve as a means to control the company’s growth and maintain stability.
- The amount of Authorized Capital is not always fully utilized by a company and can be changed with the approval of shareholders. It can be seen as a ceiling limit for potential shares issuance and plays a crucial role in protecting shareholders’ interests.
- When a company’s authorized capital exceeds its issued capital, it gives the company flexibility to raise capital in the future by issuing additional shares. This might be a strategy used by the company for potential investments, acquisitions, or debt repayments.
Importance
Authorized capital, also known as registered capital, is critical in a business because it represents the maximum amount of share capital that a company is legally allowed to issue to shareholders. This value is declared when the company is incorporated and can only be changed with shareholders’ approval.
It is important because it can impact the company’s ability to raise funds. A high amount of authorized capital may demonstrate the company’s potential for growth and the management’s ambition, which can attract investors.
Conversely, if the company has issued most of its authorized capital, it might lack the flexibility to issue additional shares in the future, restricting its fundraising options. Therefore, authorized capital is a significant aspect of a company’s financial structure.
Explanation
Authorized capital, also referred to as registered capital, serves as a pivotal concept in a company’s funding structure. It denotes the maximum value of securities (shares), in particular, that a company is legally authorized to issue to shareholders.
The purpose is to limit the company’s issuance of shares and therefore protect creditors from the company over-issuing shares which would dilute future earnings and the value each share holds. This is outlined in the company’s constitution during incorporation based on future funding requirements.
From a management perspective, the authorized capital can serve as an integral segment in planning and controlling the company’s finances. It enables the organization to plan and manage potential share issues to raise additional equity in a controlled manner.
It also provides flexibility for the company to raise capital without having to undergo the potentially expensive and time-consuming process of altering the company’s constitution. Overall, authorized capital contributes to maintaining a balanced proportion between debt and equity, thereby safeguarding the company’s financial health and stability.
Examples of Authorized Capital
Authorized capital, also known as registered capital, is the maximum amount of share capital that a company is authorized to issue to shareholders. Here are three real-world examples:
**Apple, Inc.**: In their 2021 Proxy Statement, Apple has authorized a total of 12,600,000,000 shares, comprising of 12,500,000,000 common shares and 100,000,000 preferred shares. Apple’s capital stock is authorized to be issued according to the discretion of the Board of Directors, with stipulated rights and preferences.
**Microsoft Corporation**: As per their SEC filing in 2021, Microsoft had 24 billion authorized shares of $
0000025 par value, both Class A and B, ready to be issued.
**Amazon, Inc.**: According to their 2020 SEC annual report, Amazon has authorized capital of 5 billion shares of common stock. This means the company is authorized to issue up to 5 billion shares in total.
FAQ Section: Authorized Capital
What is Authorized Capital?
Authorized capital is the maximum amount of share capital that a company is authorized to issue to shareholders. It is specified in the company’s constitution or articles of association.
Why is Authorized Capital important?
Authorized Capital is important as it sets the limit on potential equity that a company can issue. This can impact a company’s ability to raise funds or distribute dividends.
Is it necessary to use all Authorized Capital?
No, a company can decide to issue part of its authorized capital as per business needs. The portion of the authorized capital which is not issued is said to be unissued capital.
How is Authorized Capital different from Issued Capital?
Authorized Capital is the maximum limit set by a company for issuing shares. On the other hand, Issued Capital is the part of Authorized Capital which has been issued to shareholders for consideration.
Can Authorized Capital be increased?
Yes, a company can increase its Authorized Capital subject to shareholders’ approval at a general meeting and by paying additional fees to the Registrar of Companies.
Related Entrepreneurship Terms
- Share Capital
- Issued Capital
- Subscribed Capital
- Paid-Up Capital
- Capital Reserve
Sources for More Information
- Investopedia: A comprehensive online resource dedicated to investing and finance education. The website offers numerous articles explaining all aspects of authorized capital.
- Accounting Tools: This website provides a wide range of tools and explainers for financial topics including authorized capital.
- Corporate Finance Institute: It is a professional platform offering detailed financial courses, terminology and resources, including information on authorized capital.
- Entrepreneur.com: The site is rich with resources on financial management for entrepreneurs and business owners, including articles on the topic of authorized capital.
