What is paid‑up capital?
Paid‑up capital (also called paid‑in capital or contributed capital) is the equity a company has received from shareholders in exchange for issued shares. It represents cash (or other assets) actually paid to the company when shares were purchased from the company itself — typically at formation, in private placements, or at an initial public offering (IPO). Transactions on secondary markets (trades between investors) do not create paid‑up capital because the proceeds go to the selling shareholders, not the issuing company. (Sources: Investopedia; U.S. SEC)
Key takeaways
– Paid‑up capital = money shareholders have actually paid to the company for issued shares.
– It is composed of the par (nominal) value of shares plus any amount paid in excess of par (additional paid‑in capital).
– Paid‑up capital appears in shareholders’ equity on the balance sheet (common stock/preferred stock at par and additional paid‑in capital).
– Paid‑up capital cannot exceed authorized capital unless the company first increases its authorized capital. (Sources: Investopedia; Cornell Law School; U.S. SEC)
Understanding paid‑up capital
Definition and components
– Par (nominal) value: a face or nominal value assigned to each share in the corporate charter. Historically meaningful, today usually set very low (often less than $1). (Cornell Law School)
– Additional paid‑in capital (APIC): the amount investors pay above par value.
Formula: Paid‑up capital = (Par value × Number of issued shares) + Additional paid‑in capital.
Balance sheet presentation
– Two typical lines in shareholders’ equity:
1) Common stock (or preferred stock) — par value × issued shares
2) Additional paid‑in capital (or “paid‑in capital in excess of par”) — excess over par
– Total paid‑up capital is the sum of these lines and is classified as part of shareholders’ equity. (Investopedia)
Paid‑up capital vs. authorized capital
– Authorized capital = maximum number of shares (and associated capital) a company is legally permitted to issue per its corporate charter or registration.
– Paid‑up capital is generated only when the company actually issues shares and receives payment; thus it can never exceed authorized capital without first increasing authorization. Companies often authorize far more than they initially issue to allow future fundraising flexibility. (Investopedia; U.S. SEC)
Example
If a company issues 100 shares with par value $1 and sells each for $50:
– Par portion = 100 × $1 = $100 (recorded as common stock)
– APIC = 100 × ($50 − $1) = $4,900
– Total paid‑up capital = $100 + $4,900 = $5,000
Practical accounting journal entry when issuing shares for cash
– Debit: Cash $5,000
– Credit: Common stock (par) $100
– Credit: Additional paid‑in capital $4,900
Where paid‑up capital matters (implications)
– Financial structure: Paid‑up capital shows how much of a company’s financing comes from equity versus debt. Compare paid‑up capital and retained earnings to total liabilities to assess leverage and capital structure.
– Corporate governance & statutory limits: Par and authorized capital are legal constructs; some jurisdictions impose rules on minimum capital, shareholder protections, or filing requirements when issuing shares.
– Dilution: Issuing more shares increases paid‑up capital but dilutes existing ownership unless shareholders participate in the issuance.
– Cash availability: Paid‑up capital is money received by the company (not borrowed), improving liquidity and reducing reliance on debt — but the company can only raise more equity by issuing additional shares (subject to authorization and regulatory approvals). (Investopedia)
Practical steps for companies (raising equity / issuing shares)
1. Determine target capital raise and the type of shares (common vs. preferred) and rights attached.
2. Check corporate charter for authorized capital; if insufficient, seek shareholder approval to amend the charter to increase authorized shares.
3. Set par value (if not already set) consistent with jurisdictional requirements; par can be nominal. (Cornell Law School)
4. Prepare offering documentation and comply with regulatory requirements — in the U.S., register with the SEC (e.g., file registration statement for an IPO) or rely on exemptions where applicable. (U.S. SEC)
5. Price and issue shares: set the offering price; receive cash or other consideration from investors.
6. Record accounting entries: debit cash; credit common/preferred stock at par and credit APIC for amounts over par; update cap table.
7. Update statutory filings and corporate registers; disclose issuance in financial statements and regulatory filings.
8. Consider shareholder approvals, pre‑emptive rights, or regulatory approvals required in your jurisdiction before issuance.
Practical steps for investors (evaluating paid‑up capital)
1. Review the company’s balance sheet: note the par value line(s) and additional paid‑in capital to understand how much capital was raised directly by the company.
2. Examine the cap table and issuance history to see when funds were raised, at what price, and potential dilution.
3. Compare paid‑up capital to retained earnings and debt to assess capitalization and leverage.
4. Read the prospectus or offering documents to learn how raised funds will be used and the rights attached to the shares.
5. Consider whether the company may need additional equity or debt in the near future (indicator of future dilution or leverage).
Other practical and technical points
– Secondary market trades do not change paid‑up capital. Only primary issuances (company to investors) do.
– Treasury shares and buybacks: when a company repurchases its own shares, treasury stock accounting reduces shareholders’ equity; treatment differs by jurisdiction and company policy.
– Legal and tax treatment: legal capital rules, solvency thresholds, and tax implications of equity issues vary by country — consult legal/tax advisors for jurisdictional specifics.
Limitations and cautions
– Paid‑up capital is an accounting/legal measure of money invested in the company, not a direct indicator of market value or company performance. High paid‑up capital alone does not imply profitability or cash flow health.
– Par value is often nominal and has limited economic relevance today; APIC usually reflects the true capital raised above that nominal figure. (Investopedia; Cornell Law School)
The bottom line
Paid‑up capital is the equity funding a company has actually received from shareholders in exchange for issued shares. It consists of the par (nominal) value recorded as share capital plus any excess paid in (additional paid‑in capital). It is shown in the shareholders’ equity section of the balance sheet and can never exceed authorized capital without the company first increasing its authorization. Paid‑up capital is a key indicator of how much equity financing the company has used, but it should be analyzed alongside debt levels, retained earnings, and operational performance to assess financial health. (Investopedia; U.S. SEC; Cornell Law School)
Sources
– Investopedia: “Paid‑Up Capital” (Julie Bang)
– U.S. Securities and Exchange Commission: “Going Public”
– Cornell Law School Legal Information Institute: “Par Value”
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.