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What is difference of authorized share capital and paid up sharecapital?

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  • What is difference of authorized share capital and paid up sharecapital?

    (a) the concepts of authorized share capital and paid up share capital; and
    (b) how you might deal with the situation of investors who intend to buy shares in a collective company but who are presently unable to fund same.

    Just for clarification authorized share capital is the amount of share capital a company can raise. If the maximum authorized share capital of a company is $100,000 then the company can only issue and sell $100,000 worth of shares (eg 100,000 shares of one US Dollar each or 10,000 shares of Ten US dollars each or say 1,000,000 shares of say 10 cents each, etc). If the maximum authorized share capital is $US1,000,000 (1 Mill USD) then a company can issue and sell $1,000,000 worth of shares (eg 1,000,000 shares of one US Dollar each or 100,000 shares of ten USDollars each etc or ten million shares of 10 cents each).

    It is obviously in the clients’ interests to have a higher authorized share capital as it means the client can raise (or sell shares to the value of) up to one million USD (instead of just 100,000) as-of-right (and without having to come back to the registry to amend the Memo and Articles and pay a further fee to the registry).

    FYI…The law in the Seychelles has changed last year. Previously the maximum amount of share capital you could have, and still pay the minimum incorp/annual government fee, was one hundred thousand USD ($US100,000). Now you can have up to one million dollars ($US1,000,000) or more authorized share capital for the same minimum fee.

    Options

    I guess one of the first thing you will want to work out is how much of the company do you want to sell from the outset at how much do you want to leave “unsold” so you can sell further shares later?

    • Say you have 7 shareholders committed to investing 20,000 each
    • Say you want to be able to sell more shares later
    • Say 2 of the investors don’t presently have the money

    What we can do is this:

    • When we set up the company we could tailor the company to provide for both Class A shares ie voting shares and Class B shares ie non-voting shares
    • You could issue 2000 Class A shares (ie voting shares to each of the 5 shareholders) from the outset
    • You could issue an Option (to purchase 2,000 shares at a price of 10 cents each for say 6 months) to the 2 committed but presently non-financial investors
    • In the Option document we could stipulate that the price is to rise by x% per month for each month that the shares are not paid for. This extra amount is called a share premium. The initial price per share at which shares are offered/sold is called the par value.
    • New (ie non manager/non executive) shareholders may be brought in later. The board can decide at that time whether to offer further shares for sale and if so at what price.

    Point to note: If the total paid up share capital is say $100,000 (ie 5 lots of 20,000) and only 10,000 shares have been issued in total, if you hold 2,000 of those shares you own 20% of the company.

    I hop this clarifies the concept of authorised and paid up share capital (and share options) for you. .
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