Definition
Authorized Share Capital is the maximum amount of share capital that a company is authorized to issue to shareholders. This amount is laid down in the company’s memorandum of association. Before the Companies Act 2006, it was mandatory for companies to specify their maximum authorized share capital; however, this requirement has been removed. Now, companies must submit a statement of capital and initial holdings.
Examples
- Startup: A newly formed tech startup may have an authorized share capital of £1 million, but it might initially issue shares worth only £200,000 to its founders.
- Growth Company: A manufacturing company with an authorized share capital of $10 million might issue $5 million worth of shares during its initial public offering (IPO).
- Multinational Corporation: A large multinational company might authorize a share capital of €50 million but issue shares worth €30 million over several years as part of its expansion strategy.
Frequently Asked Questions
1. What is the difference between authorized share capital and issued share capital?
Answer: Authorized share capital is the maximum amount a company can issue, while issued share capital is the actual amount that has been issued to shareholders.
2. Can a company issue shares beyond its authorized share capital?
Answer: No, a company cannot issue shares beyond its authorized share capital. However, authorization can be increased by amending the company’s memorandum of association.
3. Who decides the authorized share capital of a company?
Answer: The initial authorized share capital is typically decided by the company’s founders or initial directors and laid down in the memorandum of association at the time of incorporation.
4. How can a company increase its authorized share capital?
Answer: A company can increase its authorized share capital by passing a resolution and amending its memorandum of association accordingly.
5. Is there a legal requirement to have authorized share capital under the Companies Act 2006?
Answer: No, there is no legal requirement under the Companies Act 2006 to have a specified authorized share capital. Companies are now required to submit a statement of capital and initial holdings instead.
- Issued Share Capital: The portion of authorized share capital that has been issued to shareholders.
- Memorandum of Association: A legal document that contains the fundamental conditions upon which a company is incorporated.
- Paid-Up Share Capital: The amount of money for which shares have been issued to shareholders and for which full payment has been received.
Online References
Suggested Books for Further Studies
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- “Corporate Finance: Theory and Practice” by Aswath Damodaran
- “Company Law” by Alan Dignam and John Lowry
- “Modern Corporate Finance: Theory & Practice” by Donald R. Chambers, Mark D. Willhite, and J. Robert Berton
Accounting Basics: “Authorized Share Capital” Fundamentals Quiz
### What does authorized share capital represent for a company?
- [x] The maximum amount of share capital that a company can issue.
- [ ] The amount of share capital that has been issued.
- [ ] The value of all assets owned by the company.
- [ ] The amount of share capital that has been paid up.
> **Explanation:** Authorized share capital is the maximum amount of share capital that a company is legally permitted to issue, as specified in its memorandum of association.
### Can a company issue shares beyond its authorized share capital?
- [ ] Yes, if the shareholders agree.
- [ ] Yes, but only with a special resolution.
- [x] No, it cannot.
- [ ] Yes, if approved by the board of directors.
> **Explanation:** A company cannot issue shares beyond its authorized share capital, though it can increase the authorized limit through a formal amendment.
### What replaced the requirement to specify authorized share capital after the Companies Act 2006?
- [ ] A board resolution.
- [ ] A shareholder approval.
- [x] A statement of capital and initial holdings.
- [ ] A director’s report.
> **Explanation:** The Companies Act 2006 removed the necessity to specify authorized share capital and instead requires companies to submit a statement of capital and initial holdings.
### Where is the authorized share capital specified for a company?
- [ ] Annual financial report.
- [x] Memorandum of association.
- [ ] Articles of incorporation.
- [ ] Shareholder agreement.
> **Explanation:** Authorized share capital is specified in the company's memorandum of association, a document outlining the main requirements for the company’s existence.
### Who initially decides a company's authorized share capital?
- [x] The company's founders or initial directors.
- [ ] The shareholders.
- [ ] Government regulations.
- [ ] The board of directors at the first meeting.
> **Explanation:** The initial authorized share capital is typically decided by the company's founders or initial directors and included in the memorandum of association.
### What is required to increase a company’s authorized share capital?
- [x] A resolution and amending the memorandum of association.
- [ ] A decision by the board alone.
- [ ] Approval from only major shareholders.
- [ ] Government approval.
> **Explanation:** To increase a company's authorized share capital, a formal resolution is needed and the company’s memorandum of association must be amended accordingly.
### Which document contains the fundamental conditions upon which a company is incorporated?
- [ ] Articles of incorporation.
- [x] Memorandum of association.
- [ ] Annual report.
- [ ] Company bylaws.
> **Explanation:** The memorandum of association contains the fundamental conditions and information required for the creation of a company, including its authorized share capital.
### Which term refers to the portion of authorized share capital that has been actually issued to shareholders?
- [ ] Paid-Up Share Capital.
- [x] Issued Share Capital.
- [ ] Outstanding Share Capital.
- [ ] Registered Share Capital.
> **Explanation:** Issued share capital is the portion of the authorized share capital that has actually been issued to shareholders.
### What part of the company's capital has been funded by shareholders?
- [ ] Authorized share capital.
- [ ] Memorandum capital.
- [x] Paid-up share capital.
- [ ] Documented capital.
> **Explanation:** Paid-up share capital is the amount of money for which shares have been issued to shareholders and for which full payment has been received.
### Following the Companies Act 2006, what action must new companies perform related to their share capital?
- [ ] Specify a high authorized share capital.
- [ ] Issue maximum share capital immediately.
- [x] Submit a statement of capital and initial holdings.
- [ ] Avoid mentioning any form of capital.
> **Explanation:** Following the Companies Act 2006, new companies must submit a statement of capital and initial holdings as part of their statutory requirements.
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