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Authorised Capital for Private Limited Company Registration

Authorised Capital, Private Limited Company Registration, Startup

Authorised Capital for Private Limited Company Registration

Many Entrepreneur starting a new private limited company are still determining the concept of authorized capital and are often unsure of the amount of authorized capital they should begin their new private limited company with. In this article, we answer one of the most frequently asked questions from Entrepreneurs: how much authorized capital is required to start a new private limited company?

Private Limited Company

A private limited company is a unique type of business entity. Under the Companies Act 2013:

  • It can have between 1 and 50 shareholders.
  • The shareholders of a private limited company have limited liability, meaning they are only liable to the extent of their shareholding in the company. They aren’t personally responsible for the company’s debts unless there’s an act of fraud or misrepresentation.

Types of Capital in a Private Limited Company

A private limited company generally has two main types of capital:

  • Authorized Share Capital
  • Paid-up Share Capital

Authorised Capital Explained

Authorized capital, also known as nominal capital, refers to the maximum amount of share capital that a private limited company is authorized to issue to its shareholders. It is the ceiling amount up to which a company can raise funds by issuing shares. This amount is delineated in the company’s Memorandum of Association (MOA), a key document that outlines the scope of activities the company is permitted to undertake.

The authorized capital indicates the potential expansion and growth opportunities a company foresees.

Paid-up Share Capital

This represents the number of shares the company has issued and received payment for. For example, if a company’s authorized capital was Rs. 10 lakh at its inception, but it has only raised Rs. 7 lahks by selling shares, then its paid-up capital stands at Rs. 7 lahks.

Definition of Authorised Capital

As per Section 2(8) of the Companies Act 2013, authorized or nominal capital is the maximum share capital the company is allowed to raise, as determined by its MOA.

Minimum and Maximum Authorized Capital for a Private Limited Company

The authorized capital of a private limited company refers to the maximum amount of share capital for which shares can be issued to its shareholders. Under the Companies Act of 2013, there isn’t a defined maximum limit for authorized capital, but there have been changes concerning the minimum capital requirement.

Minimum Authorized Capital

Previously, as per the Companies Act of 2013, a private limited company was mandated to have a minimum authorized capital of INR 100,000 for its incorporation.

This requirement was abolished by the amending act of 2015. Now, there’s no specific minimum capital requirement for a private limited company to start its operations.

Example: Considering a hypothetical company, XYZ Private Limited, with an authorized capital of Rs. 5 lakh. This means the company can issue shares to its shareholders up to a total value of Rs. 5 lakh. The company can choose to issue shares of lesser value, say Rs. 3 lakh, but it cannot surpass the authorized limit of Rs. 5 lakh.

What is Authorised Capital Used For?

Authorized capital represents the maximum value of shares a private limited company can issue to its shareholders. Here’s a clearer breakdown of its usage and importance:

  • Initiation of Business: The authorized capital sets the ceiling for the amount of money a company can raise when it starts its business. This amount is divided into shares and then offered to potential investors. Those who purchase these shares become the company’s shareholders and, in effect, partial owners.
  • Ownership and Control: When individuals or entities buy shares, they buy a portion of the company, granting them ownership rights. In cases where a sole proprietor establishes a private limited company, they might initially hold all the shares, making them both the primary shareholder and owner.
  • Regulatory Requirements: As per your description, if a company’s authorized capital exceeds ₹50 lakhs, it must register with the Registrar of Companies (RoC) and obtain a certificate that confirms adherence to all necessary stipulations related to the commencement of business. However, it’s essential to note that these thresholds and requirements can vary based on legal amendments and regional variations.
  • Modes of Payment: When investors buy shares, they can make payments in cash, bank drafts, or cheques. If payment is made through a cheque, it must be cleared and funds available before the company can proceed with registration or any other related process.

In summary, authorized capital is a crucial component of a company’s financial structure, determining its capacity to raise funds from shareholders and ensuring compliance with regulatory requirements.

Uses and Implications of Authorised Capital

  • Starting a Business: The authorized capital denotes the maximum amount of money a company can raise from its shareholders when initiating its business. This capital is divided into shares, and when these shares are sold to investors, they become shareholders, thereby obtaining ownership in the company.
  • Ownership Structure: When a single proprietor forms a company, they might initially be the sole shareholder, giving them complete ownership. Over time, as the company grows, it might decide to sell more shares, thereby diluting its ownership.
  • Regulatory Compliance: If a company’s authorized capital surpasses ₹50 lakhs, it must register with the Registrar of Companies (RoC). Additionally, the company must acquire a certificate from the RoC, confirming that it has met all the prerequisites for initiating its business operations.
  • Payment Modalities: Payments towards shares can be made in various forms, such as cash, bank drafts, or cheques. However, if payment is through a cheque, it’s vital to ensure it clears before proceeding with any registration steps.

In essence, authorized capital sets the foundation for a company’s financial structure.

Authorised Capital for Startups

The majority of the startups today are bootstrapped and are unable to pay a significant fee to the Ministry of Corporate Affairs for incorporation of a company with an authorized capital proportional to the investment in the company. Therefore, most promoters incorporate their company with the minimum authorized capital of Rs.1 lakh and issue shares valued at Rs.1 lakh or less to founding members. The rest of the capital invested by the founding members in the Private Limited Company is classified as either unsecured loan or, share application money or share premium, thereby reducing the need to increase the authorized capital of the company during the startup and growth stages.

Once the private limited company starts scaling up operations and requires debt or equity, the authorized capital of the company is raised, and additional shares are issued to the founding members proportional to their investment in the company. Therefore, it is acceptable for most startups to start their operations with the minimum authorized capital of Rs.1 lakh and then increase the official capital of the private limited company as the necessity for debt or equity funding arises.

Differences Between Authorized Capital and Paid-up Capital

Authorized and paid-up capital are crucial components of a company’s financial structure, with distinct roles and implications. Here’s a tabulated differentiation between the two:

Aspect Authorized Capital Paid-up Capital
Definition Represents the maximum number of shares a company is permitted to issue. Refers to the total value of shares issued and paid for by the shareholders.
Change in Value This can be increased with the approval of the board. It can only be increased up to the limit of the authorized capital.
Relation to the Company’s Net Worth Does not directly contribute to the calculation of a company’s net worth. Directly calculates a company’s net worth as it represents actual funds received.
Comparison with Each Other Authorized capital sets the ceiling and cannot be less than the paid-up capital. Represents the actual raised capital and can never exceed the authorized capital.

Modification Procedures

The authorized capital amount mentioned in the MOA can be changed. The process and regulations governing such alterations are stipulated by Sections 61-64 of the Companies Act, 2013. Additionally, Sections 13 and 14 of the Act dictate the changes to the MOA and Articles Of Association (AOA) – two fundamental documents of a company

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