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 only created when a company sells its shares on the primary market directly to investors. When shares are bought and sold between investors on the secondary market, no additional paid-up capital is created because the proceeds of those transactions go to the selling shareholders, not the issuing company.
Explaining ‘Paid-Up Capital’
Paid-up capital, also called paid-in capital or contributed capital, is comprised of two funding sources: the par value of stock and additional paid-in 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, depending on the type of stock issued.
Paid-Up 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).
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 or gets 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 to the company’s level of debt to assess if it has a healthy balance of financing given its operations, business model and the prevailing standards in its industry.
Further Reading
- Re-engineering agriculture for enhanced performance through financing – papers.ssrn.com [PDF]
- Impacts of equity financing on liquidity position of a firm – www.tandfonline.com [PDF]
- Research on China SMEs Financing Efficiency [J] – en.cnki.com.cn [PDF]
- Subregional financial cooperation: the South American experience – www.tandfonline.com [PDF]
- Financial Appraisal of Haryana State Cooperative Apex Bank – ideas.repec.org [PDF]
- Integrating risk management and capital management – onlinelibrary.wiley.com [PDF]
