Definition, How It Works, and Importance

What Is Paid-Up Capital?

Paid-up capital is the amount of money a company has received from shareholders in exchange for shares of stock. Paid-up capital is created when a company sells its shares on the primary market directly to investors, usually through an initial public offering (IPO). When shares are bought and sold among investors on the secondary marketno additional paid-up capital is created as proceeds in those transactions go to the selling shareholders, not the issuing company.

Understanding Paid-Up Capital

Paid-up capital, also called paid-in capital or contributed capitalis arrived at from two funding sources: the by value of stock and excess capital. Each share of stock is issued with a base price, called its par. Typically, this value is quite low, often less than $1. Any amount paid by investors that exceeds the par value is considered additional paid-in capital, or paid-in capital in excess of par. On the balance sheet, the par value of issued shares is listed as common stock or preferred stock under the shareholder equity section.

For example, if a company issues 100 shares of common stock with a par value of $1 and sells them for $50 each, the shareholders’ equity of the balance sheet shows paid-up capital totaling $5,000, consisting of $100 of common stock and $4,900 of additional paid-up capital.

Paid-Up Capital vs. Authorized Capital

When a company wants to raise equity, it cannot simply sell off pieces of the company to the highest bidder. Businesses must request permission to issue public shares by filing an application with the agency responsible for the registration of companies in the country of incorporation. In the United States, companies wanting to “go public” must register with the Securities and Exchange Commission (SEC) before issuing an initial public offering (IPO).

The maximum amount of capital a company is given permission to raise via the sale of stock is called its authorized capital. Typically, the amount of authorized capital a company applies for is much higher than its current need. This is done so that the company can easily sell additional shares down the road if the need for further equity arises. Since paid-up capital is only generated by the sale of shares, the amount of paid-up capital can never exceed the authorized capital.

Importance of Paid-Up Capital

Paid-up capital represents money that is not borrowed. A company that is fully paid-up has sold all available shares and thus cannot increase its capital unless it borrows money by taking on debt. A company could, however, receive authorization to sell more shares.

A company’s paid-up capital figure represents the extent to which it depends on equity financing to fund its operations. This figure can be compared with the company’s level of debt to assess if it has a healthy balance of financing, given its operations, business model, and prevailing industry standards.