Paid up capital refers to the amount of money a corporation receives for issuing shares to a shareholder.
In this article, I will break down the notion of Paid Up Capital so you know all there is to know about it!
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Let me explain to you what paid up capital is and why it’s important!
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What Is Paid Up Capital
Paid up capital refers to the amount of money a shareholder pays a corporation in exchange for shares of stock.
The paid up capital is an important concept for companies and shareholders as it reflects the amount for which a company sells its shares when they are first issued.
For example, Mary pays a corporation $1,000 to receive 1,000 shares.
The paid up capital for the corporation for the 1,000 shares will represent $1,000.
The corporation must recognize its paid up capital when it issues shares for the first time to a shareholder.
However, paid up capital will not be created when a shareholder already owns shares and sells it to another.
For instance, shares that are publicly traded on the stock exchange will not have any impact on the corporation’s paid up capital.
How Paid Up Capital Works
Paid up capital of a corporation consists of two values, the par value and the excess capital.
The par value of a company’s stock is a base stock price, which is generally very low.
In many cases, a company’s par value is $1 per share or less.
Now, if the company has shares with a par value of $1 and sells the shares for $10 per share, it will need to record $1 as par value and $9 as excess capital.
Excess capital is the amount of money the company has received in excess of the stock’s par value.
In our example, the investor paying $9 more than the par value is paying additional paid-in capital representing an amount paid over and above the stock’s par value.
Paid Up Capital Tax Consequences
For a shareholder, the amount that is paid for the shares is important.
Generally, an investor that purchases shares is entitled to get back the paid up capital on his or her shares tax-free.
In other words, the government will not tax the amount a shareholder used in capital to purchase his or her shares.
However, any amount exceeding the paid up capital will be taxed.
The profit a shareholder generates over and above the paid up capital will be taxes as capital gains.
For example, a shareholder purchases 100 shares of a company for $10,000.
In a few years, the shareholder sells the shares for $15,000.
In this case, the shareholder’s paid up capital of $10,000 is not taxed.
However, the $5,000 the shareholder earned over and above the initial investment will be the shareholder’s capital gains.
Paid Up Capital vs Authorized Capital
What is the difference between paid up capital and authorized capital?
Paid up capital refers to the amount of money that was paid to a company in exchange for the issuance of shares to a shareholder.
The paid up capital is composed of the stock’s par value and excess capital paid on top of the par value.
On the other hand, authorized capital refers to the total number of shares a company is authorized to issue to shareholders.
For example, if a company’s authorized capital is 100,000,000 shares, this means that it is not authorized to issue more than that number of shares to all shareholders combined.
Publicly traded companies will typically need to request permission to issue shares to the public and will need to demonstrate that they have enough authorized capital to permit the share issuance.
So there you have it folks!
What is paid up capital?
In a nutshell, paid up capital represents the sums received by a company from a shareholder to purchase shares in the company.
The paid up capital is recognized by the company when issuing shares in the primary market.
Transactions on the secondary market do not impact a company’s paid up capital on its balance sheet.
The paid up capital is composed of the stock’s par value and excess capital, representing the amount paid by the shareholder in excess of the par value.
Companies that sell shares to finance their operations are required to keep a record of how much they received in exchange for the issuance of the shares.
A company relying heavily on equity financing will have a higher paid up capital on its balance sheet than another company that does not.
If you are looking to sell or purchase shares and you have question about the legal impact of the transaction, be sure to speak to a corporate lawyer for advice.
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