Authorized Share Capital and Issued Share Capital Explained

 

Understanding the concepts of authorized share capital and issued share capital is crucial for entrepreneurs, investors, and business owners. These terms play significant roles in corporate financing and governance, especially in determining a company’s structure and financial capabilities.

 

In this article, we will break down the meanings, differences, and implications of authorized share capital and issued share capital to help you gain a clearer perspective. By the end of this guide, you’ll have actionable insights into how these terms impact company registration, share allocation, and compliance requirements.

 

 

What Is Authorized Share Capital?

 

Authorized share capital, also known as nominal share capital, refers to the maximum amount of share capital a company is legally permitted to issue to its shareholders as stated in its memorandum of association.

 

Key Features of Authorized Share Capital:

 

1. Limit Defined by Memorandum: This value is specified in the company’s incorporation documents, such as the memorandum and articles of association.

 

2. Flexibility for Future Growth: It provides the company with the flexibility to issue more shares in the future if required, without altering its corporate structure.

 

3. No Immediate Financial Obligation: Authorized share capital represents potential rather than actual financial liability, as shares are not issued unless required.

 

Example:

A company with an authorized share capital of ₦10,000,000 can issue shares worth up to ₦10,000,000 but no more without altering its authorized limit through a formal process.

 

 

For registration of business name, company and incorporated trustees, call us or send WhatsApp message to 08155554892.

 

 

What Is Issued Share Capital?

 

Issued share capital refers to the portion of the authorized share capital that the company has allocated and distributed to its shareholders. This represents the actual shares that have been issued and paid for (partially or fully) by investors.

 

Key Features of Issued Share Capital:

 

1. Represents Actual Shares: Issued share capital reflects shares currently in circulation, representing actual ownership and investment.

 

2. Directly Affects Ownership: It determines the distribution of ownership and voting rights among shareholders.

 

3. Obligates the Company to Shareholders: Issued shares come with responsibilities such as dividend payments (if applicable) and voting rights.

 

Example:

If a company has an authorized share capital of ₦10,000,000 but has issued shares worth ₦6,000,000, the remaining ₦4,000,000 remains unissued and available for future allocation.

 

 

Key Differences Between Authorized Share Capital and Issued Share Capital

 

Aspect	Preference Shares	Ordinary Shares
Dividend Rights	Receive fixed dividends before ordinary shareholders.	Receive dividends only after preference shareholders.
Voting Rights	Usually do not carry voting rights.	Typically carry voting rights.
Risk Level	Lower risk due to fixed dividends and priority in assets.	Higher risk as dividends and assets are not guaranteed.
Liquidation Priority	Priority claim over the company’s assets during liquidation.	Residual claim after preference shareholders.
Dividend Rate	Fixed or predetermined.	Variable and dependent on company profits.
Convertibility	Can sometimes be converted into ordinary shares.	Cannot be converted into preference shares.

 

Implications of Authorized and Issued Share Capital in Nigeria

 

For Company Registration

 

In Nigeria, authorized share capital is a mandatory declaration during the incorporation process with the Corporate Affairs Commission (CAC). The amount chosen often determines the incorporation fee and sets the ceiling for future share issuance.

 

For Regulatory Compliance

 

1. Minimum Share Capital: Certain industries in Nigeria, such as banking, oil and gas, and telecommunications, have specific minimum share capital requirements. For example, a security company must have a minimum authorized share capital of ₦10,000,000.

 

2. Reporting Obligations: Companies are required to report changes in issued share capital to the CAC.

 

 

How to Increase Authorized or Issued Share Capital

 

Increasing Authorized Share Capital

 

1. Board and Shareholder Approval: Pass a resolution during a board or shareholders’ meeting.

 

2. Amendment of Memorandum: Update the company’s memorandum to reflect the new limit.

 

3. Regulatory Filing: File the necessary forms with the CAC and pay the prescribed fees.

 

 

Increasing Issued Share Capital

 

1. Board Resolution: Approve the issuance of additional shares.

 

2. Share Allocation: Allocate shares to existing or new shareholders.

 

3. Regulatory Filing: Notify the CAC about the new share issuance.

 

 

Why the Distinction Matters

 

Investment Decisions

Investors often examine both authorized and issued share capital to understand the company’s capacity for expansion and current shareholder structure.

 

Corporate Control

Issued share capital determines the distribution of control within the company, while authorized share capital sets the boundaries for potential growth.

 

Legal and Financial Planning

A clear distinction helps in financial forecasting and ensures compliance with corporate regulations.

 

 

Conclusion

 

Authorized share capital and issued share capital are fundamental concepts in corporate finance and governance. While authorized share capital defines the upper limit of share issuance, issued share capital reflects the actual investment and ownership within the company.

 

Understanding these differences is essential for making informed decisions during company registration, share allocation, and business expansion. If you’re planning to register your company or make changes to your share capital, consulting experts can help ensure compliance and streamline the process.

 

Need help with company registration or share capital adjustments in Nigeria? Contact us at CACregistration.com for expert guidance on all Corporate Affairs Commission (CAC) services.