Share capital and paid-up capital are both important concepts in the world of corporate finance and relate to the ownership structure of a company. However, they refer to different aspects of a company’s capital structure.
What is Share Capital?
Share capital refers to the total amount of capital that a company is authorised to raise through the issuance of shares to its shareholders. It represents the maximum amount of capital that a company can raise by issuing new shares to investors.
Share capital is typically divided into different classes of shares, such as ordinary shares or preference shares, each with its own rights and privileges.
Both represent ownership in a company, but ordinary shares give the holder the right to vote on matters that affect the company, such as electing the board of directors or approving major transactions, while preference shares do not. Taking several other factors into consideration, ordinary shares are more often seen as more volatile but with greater potential for capital appreciation, while preference shares are often seen as less volatile but with lower potential for capital appreciation.
What is Paid Up Capital?
Paid-up capital refers to the amount of share capital that has actually been paid by the shareholders to the company. It represents the actual cash or other assets that have been contributed by shareholders in exchange for the company’s shares.
Paid-up capital is typically a subset of share capital and is the portion of share capital that has been actually received by the company.
In other words, while share capital represents the total amount of capital that a company can raise through share issuance, paid-up capital represents the actual portion of that capital that has been contributed by the shareholders and received by the company.
A hypothetical example
Let’s say that Company A is authorised to issue 100,000 shares with a par (face) value of $1 each. This means that Company A’s share capital is $100,000 ($1 x 100,000).
Company A now decides to issue 50,000 shares to the public. If all shares are purchased, Company A will have raised $50,000 in share capital.
However, not all of the shareholders may have paid upfront in full!
Let’s say that at the end of the first year, only 40,000 shares have been fully paid for by the shareholders. This means that Company A’s paid-up capital is $40,000 ($1 x 40,000).
If Company A wants to raise more capital, it can issue more shares to investors up to its authorised share capital of $100,000. However, it will only have additional paid-up capital if investors actually pay the full par value of the shares they purchase.
We hope you found this piece educational and would like to suggest you check out our article explaining the difference between shareholders and investors.