Important Differences Between Authorized Capital and Issued Capital

Recently updated on August 20th, 2023 at 11:55 am

Authorized Capital

Authorized capital is the maximum amount of shares a company is legally allowed to issue, as stated in its articles of incorporation or charter. This is set by the company’s board of directors and approved by shareholders. It is the limit of shares that the company can issue to raise the funds. Once the shares are issued, it is known as issued capital. Authorized capital is important because it sets a limit on how much the company can raise through issuing shares and it also limits the dilution of current shareholders’ ownership in the company.

Examples of Authorized Capital

An example of authorized capital would be a company with an authorized capital of $1,000,000 and 1,000,000 shares. This means that the company is allowed to issue up to 1,000,000 shares to raise funds. The company’s board of directors has the authority to issue shares up to the authorized capital limit as they see fit, whether it be all at once or in stages.

Another example would be a company with an authorized capital of $5,000,000 and 10,000,000 shares. This means that the company can issue up to 10,000,000 shares to raise funds. The company’s management and board may decide to issue shares gradually over time, according to the company’s need for capital.

Types of Authorized Capital

There are two types of authorized capital:

  1. Common authorized capital: This type of authorized capital is related to the common shares of the company and it is the capital that the company can raise by issuing common shares.
  2. Preferred authorized capital: This type of authorized capital is related to the preferred shares of the company and it is the capital that the company can raise by issuing preferred shares. Preferred shares typically have a higher claim on assets and earnings than common shares and they may also have different voting rights.

Characteristics of Authorized Capital

The characteristics of authorized capital include:

  • Legal Limit: Authorized capital is the maximum amount of shares that a company is legally allowed to issue, as stated in its articles of incorporation or charter.
  • Set by Board of Directors: Authorized capital is set by the company’s board of directors, who have the authority to decide the total number of shares that can be issued.
  • Approved by Shareholders: Authorized capital must be approved by the shareholders of the company, who have the power to approve or disapprove the number of shares to be issued.
  • Upper Limit of Fund Raising: Authorized capital represents the upper limit of the number of shares that a company can issue to raise funds.
  • Dilution of Shareholders’ Ownership: Authorized capital also limits the dilution of current shareholders’ ownership in the company, as the total number of shares outstanding can’t exceed the authorized capital limit.
  • Flexible: Authorized capital is flexible, meaning the company can increase or decrease the number of authorized shares as per the requirement, subject to the shareholders’ approval.
  • Two Types: Authorized capital comes in two types, common authorized capital and preferred authorized capital, each of them with different rights and privileges.

Issued Capital

Issued capital refers to the number of shares that a company has actually issued and are currently outstanding. This is typically less than the authorized capital. Issued capital represents the actual amount of funds that a company has raised by issuing shares. The company can issue shares to raise funds for its operations, expansion, or to pay off debt. Once shares are issued, they can be traded on the stock market, and the company becomes a publicly-traded company. Shareholders of issued capital have voting rights and are entitled to receive dividends, if any, declared by the company.

Examples of Issued Capital

An example of issued capital would be a company with an authorized capital of $1,000,000 and 1,000,000 shares, but has only issued 500,000 shares. This means that the company has only issued 500,000 shares to raise funds and has not yet issued the remaining 500,000 shares. The 500,000 shares that have been issued represent the company’s issued capital.

Another example would be a company with an authorized capital of $5,000,000 and 10,000,000 shares, but has only issued 7,500,000 shares. This means that the company has only issued 7,500,000 shares to raise funds, and still has the possibility to issue the remaining 2,500,000 shares.

Types of Issued Capital

The types of issued capital are similar to the types of authorized capital, which are:

  1. Common issued capital: This type of issued capital is related to the common shares of the company that have been issued and are currently outstanding. Common shareholders are entitled to voting rights and may be entitled to dividends, if any, declared by the company.
  2. Preferred issued capital: This type of issued capital is related to the preferred shares of the company that have been issued and are currently outstanding. Preferred shareholders have a higher claim on assets and earnings than common shareholders and they may also have different voting rights.

Characteristics of Issued Capital

The characteristics of issued capital include:

  • Actual Amount of Funds Raised: Issued capital represents the actual amount of funds that a company has raised by issuing shares.
  • Less than Authorized Capital: Issued capital is typically less than the authorized capital, as the company may not issue all the shares it is authorized to issue.
  • Outstanding Shares: Issued capital refers to the number of shares that a company has actually issued and are currently outstanding.
  • Voting Rights: Shareholders of issued capital have voting rights and can participate in the company’s decision-making process.
  • Entitlement to Dividends: Shareholders of issued capital are entitled to receive dividends, if any, declared by the company.
  • Publicly Traded: Once shares are issued, they can be traded on the stock market, and the company becomes a publicly-traded company.
  • Two Types: Issued capital comes in two types, common issued capital and preferred issued capital, each of them with different rights and privileges.
  • Limited: The number of shares that are issued is limited by the authorized capital, and the company can not issue more shares than the authorized capital.

Comparison Between Authorized Capital and Issued Capital

Here is a comparison table that highlights the differences between authorized capital and issued capital:

Characteristic

Authorized Capital

Issued Capital

Definition The maximum amount of shares a company is legally allowed to issue  The number of shares that a company has actually issued
Legal Limit Yes No
Funds Raised No Yes
Outstanding Shares No Yes
Voting Rights No Yes
Entitlement to Dividends No Yes
Publicly Traded No Yes
Dilution of current shareholders’ ownership Yes No
Types         Common and preferred Common and preferred

Important Differences Between Authorized Capital and Issued Capital

  1. Legal Limit: Authorized capital is the maximum amount of shares a company is legally allowed to issue, while there is no legal limit on issued capital.
  2. Funds Raised: Authorized capital does not represent the actual amount of funds raised by the company, while issued capital represents the funds that the company has raised by issuing shares.
  3. Outstanding Shares: Authorized capital does not refer to the number of shares that are currently outstanding, while issued capital refers to the number of shares that are currently outstanding.
  4. Voting Rights: Authorized capital does not come with voting rights, while issued capital does. Shareholders of issued capital have the right to vote on company matters.
  5. Entitlement to Dividends: Authorized capital does not come with entitlement to dividends, while issued capital does. Shareholders of issued capital are entitled to receive dividends, if any, declared by the company.
  6. Publicly Traded: Authorized capital does not make the company publicly traded, while issued capital does. Once shares are issued, they can be traded on the stock market, and the company becomes a publicly-traded company.
  7. Dilution of current shareholders’ ownership: Authorized capital increases the dilution of current shareholders’ ownership in the company, while issued capital does not.
  8. Types: Authorized capital and issued capital come in two types, common and preferred, with different rights and privileges.

Conclusion Between Authorized Capital and Issued Capital

In conclusion, authorized capital and issued capital are both important concepts in a company’s financial structure. Authorized capital represents the maximum number of shares that a company is legally allowed to issue, while issued capital represents the actual number of shares that the company has issued to raise funds. Both authorized and issued capital play a role in determining a company’s financial health and stability. Authorized capital limits the dilution of current shareholders’ ownership and sets a limit on how much the company can raise through issuing shares, while issued capital represents the funds that the company has raised and gives rights to shareholders like voting rights and entitlement to dividends. Understanding the difference between authorized and issued capital is important for investors, shareholders, and company management to make informed decisions.

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