What Is Paid-Up Capital?
Paid-up capital represents the money a company receives from shareholders in exchange for shares of stock, particularly when sold directly on the primary market, such as through an initial public offering (IPO). Shares traded on the secondary market do not contribute to paid-up capital as those transactions benefit the selling shareholders, not the issuing company.
Key Takeaways
- Paid-up capital is the amount received from selling stock directly to investors.
- The primary market is where paid-up capital originates, typically through an IPO.
- Funding sources for paid-up capital include par value of stock and excess capital.
- It represents investment money exceeding the par value of stock.
- Paid-up capital is a key component of equity financing.
Mastering the Concept of Paid-Up Capital
Paid-up capital, also known as paid-in capital or contributed capital, is derived from two main sources: the par value of stock and excess capital. Each stock share has a par value, often set below $1. Any excess amount paid by investors over the par value is additional paid-in capital.
On the shareholders’ equity section of the balance sheet, the par value of issued shares appears as common or preferred stock. The share capital can be classified as:
- Paid-up capital: Funds already received from investors.
- Called-up capital: Funds the company expects to receive.
- Paid-in capital: Represents funds satisfying the full purchase price of shares.
For instance, if a company issues 100 common stock shares with a $1 par value and sells them at $50 each, its paid-up capital totals $5,000, broken down into $100 of common stock and $4,900 of additional paid-in capital.
Authorized Capital vs. Paid-Up Capital: What You Should Know
When a company seeks to raise equity, it cannot freely distribute shares. Businesses must apply to the relevant regulatory authority (such as the SEC in the U.S.) before launching an IPO. The authorized capital is the maximum amount a company can raise through stock sales, usually set higher than current needs for future expansion without additional permissions. Paid-up capital, being the actual amount raised from share sales, can never surpass the authorized capital.
The Significance of Paid-Up Capital
Paid-up capital is crucial because it represents non-borrowed money. A fully paid-up company has sold all its available shares and can’t increase its capital without borrowing unless it is authorized to issue more shares.
This figure shows the degree to which a company relies on equity financing to maintain operations. Comparisons between a company’s paid-up capital and its debt reveal whether it has a balanced financial strategy, given its industry standards, operational model, and market conditions.
By understanding these elements, investors can better gauge a company’s financial health and investment potential.
Related Terms: Primary market, Secondary market, Par value, IPO, Authorized capital.
References
Get ready to put your knowledge to the test with this intriguing quiz!
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## What is Paid-Up Capital?
- [ ] The total value of authorized shares a company can issue
- [ ] The amount of profit retained by a company
- [x] The amount of money shareholders have invested in a company through the purchase of its shares
- [ ] The capital obtained through debt financing
## How is Paid-Up Capital different from Authorized Capital?
- [ ] Paid-Up Capital is the maximum amount that shareholders can invest, while Authorized Capital is the actual amount invested
- [x] Paid-Up Capital represents the funds actually received from shareholders through share issuance, while Authorized Capital is the maximum value of shares a company can legally issue
- [ ] Paid-Up Capital includes loans and debtor’s capital, while Authorized Capital solely includes equity from share issuance
- [ ] There is no difference; both terms are interchangeable
## Why is Paid-Up Capital important for a business?
- [ ] It indicates the company’s reputation among competitors
- [x] It shows the actual investment from shareholders and provides a buffer for business operations against liabilities
- [ ] It determines the company's credit rating
- [ ] It is required for determining tax liabilities
## Which of the following is included in Paid-Up Capital?
- [ ] Bonds and debentures
- [x] Equity shares purchased by investors
- [ ] Bank loans and overdrafts
- [ ] Retained earnings
## How can a company increase its Paid-Up Capital?
- [ ] By taking out more loans
- [x] By issuing new shares to investors
- [ ] By retaining profits
- [ ] By reducing its liabilities
## Can Paid-Up Capital be returned to shareholders under normal business operations?
- [ ] Yes, it's returned exactly like dividends
- [ ] Yes, it can be paid back through profit-sharing
- [x] No, Paid-Up Capital is permanently invested into the company unless the company liquidates or buys back its shares
- [ ] No, it completely converts into liabilities over time
## What does an increase in Paid-Up Capital indicate for investors?
- [ ] A decrease in the company’s equity
- [ ] A deterioration of the company’s stock value
- [x] A strong show of investor confidence and potential for growth, as more funds have been injected into the company
- [ ] Imminent liquidation of the company
## In which financial statement is Paid-Up Capital typically reported?
- [x] Balance Sheet
- [ ] Income Statement
- [ ] Statement of Cash Flows
- [ ] Statement of Retained Earnings
## What control do shareholders acquire through Paid-Up Capital?
- [ ] Control over the withdrawal of profits
- [ ] Control over debt restructuring
- [x] Voting rights and a say in the company’s strategic decisions
- [ ] Control over daily operations of the company
## Is there a statutory limit to how much Paid-Up Capital a company can have?
- [x] Yes, it cannot exceed the Authorized Capital without amendment
- [ ] No, Paid-Up Capital can be infinitely increased over time
- [ ] Yes, it is always capped by the total company assets
- [ ] No, Paid-Up Capital is only limited by market demand for shares
