Difference Between Authorised and Issued Share Capital
When it comes to a company's financials, the terms "authorised" and "issued" share capital can often be confusing. Understanding the difference between these two terms is important for understanding a company's ability to raise funds at any given time by issuing new shares.
In this article, we examine the key differences between authorised and issued share capital.
Authorised Share Capital
Authorised share capital refers to the maximum number of shares that a company is permitted to issue. The company's memorandum must state the authorised share capital.
The greater the authorised share capital, the more shares can be issued. In case the company has issued shares equal to the authorised share capital and needs to issue additional shares, then it must increase the authorised share capital. This process can usually be time consuming and costly, as it needs to follow procedures set by law and by the articles of association. It is therefore typical for companies to start with a relatively high authorised capital, in order to avoid this slow process for every additional fundraising round.
Issued Share Capital
Issued share capital, on the other hand, refers to the actual number of shares that have been issued to members of the company. This number is typically lower than the authorised share capital, as a company may choose to hold onto some shares for future issues or for other strategic reasons.
For example, if a company has authorised share capital of 1 million shares, but has only issued 500,000 shares (i.e. issued share capital), it means that it has the capacity to issue another 500,000 shares.
The difference between authorised and issued share capital is useful for investors to understand. Authorised share capital is the maximum number of shares a company is permitted to issue at any given time, while issued share capital is the actual number of shares that a company has issued.
Knowing a company's authorised share capital can give an indication of their potential for immediate growth and capital fundraising.
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