Difference Between Authorised and Issued Share Capital

Key Difference – Authorised vs Issued Share Capital
 

The share capital is the main source of raising funds for business. A ‘share’ is a unit of ownership and can be transferred from one investor to another. The key difference between authorised and issued share capital is that while authorised share capital is the maximum amount of capital that a company is authorised to raise from the public by the issue of shares, the issued share capital is the amount of capital that is raised through the share issue in practice.

Contents

1. Overview and Key Difference
2. What is Issued Share Capital
3. What is Authorised Share Capital
4.  Side by Side Comparison – Authorised vs Issued Share Capital

What is Issued Share Capital?

Issued shares mainly comprise of ordinary shares and preference shares. Shareholders of ordinary shares are the principal owners of the business who have voting rights. These type of shares carry higher risks since the shareholders will be settled last (and if the funds are available) after all debt holders and preference shareholders in case of liquidation. Preference shares do not carry voting rights but are entitled to fixed receipt of dividends.

Accounting entry for share issue

Cash A/C                            Dr

Share capital A/C                                  Cr

Advantages of Issued Share Capital

Source of Additional Finance

The main advantage of a share issue is the ability to raise additional finance. This is a relatively easy method of raising finance mainly since the company does not have to pay interest on raising capital such as in debt financing.

Limited Burrowing of Debt

Since the debt financing is limited, the company is less geared (the percentage of debt is lesser compared to equity). This will make the company look more credible, and interest does not have to be paid for borrowings.

Disadvantages of Issued Share Capital

Loss of control

The main disadvantage is the loss of control by the existing shareholders. Shareholders are entitled to various rights, and they have direct control over the decisions and matters of the company. When the shares are distributed over a number of shareholders, the power is diluted.

Division of Profits

As the number of shareholders grows, the profits should be divided among them proportionate to their shareholding.  Many companies issue profits in the form of dividends. In exchange for raising capital, the company’s original owners lose much of the money they would otherwise have earned through revenues.

What is Authorised Share Capital?

Authorised share capital also refers to as maximum, registered or normal capital. This is the maximum amount of capital that a company is authorised to raise from the public by the issue of shares. The amount of authorised share capital should be specified in the Certificate of Incorporation, which is a legal document relating to the formation of a company. There is no standard minimum or maximum percentage as to how much the authorised share capital should be; this will be based on the discretion of the owners of the company.

E.g. Upon listing shares on a stock exchange, the company may decide that only 60% of ownership will be transferred to new investors.

Having said that, certain stock exchanges may have requirements for companies to have a minimum amount of authorised share capital as a requirement of being listed on the exchange. For example, the London Stock Exchange requires public companies to have at least £50,000 of authorised share capital to be listed.

The entire authorised share capital will not be issued to the public at the same time, only a part of it will be issued. The main reason for the same is if the entire authorised capital is issued at the same time and if a need arises to increase the amount of authorised capital in the future, extra charges should be bared. The remaining amount of capital is referred to as the ‘unissued capital’ and is kept aside in a reserved option pool to be utilised in the future. For instance, if the company had an authorised share capital of 10,000 shares and decided to keep 1,000 shares in reserves then 9,000 shares will be issued to the public investors.

What is the difference between Authorised and Issued Share Capital?

Reference:

“Wikimedia Philippines Certificate of Incorporation” By Picture taken by Jojit fb and uploaded by Scorpion prinz – Own work (CC BY-SA 3.0) via Commons Wikimedia