Authorized capital is the most capital a company is allowed to have in the form of stocks (shares) as stated in its articles of incorporation or stipulated by shareholder vote. It is the amount of equity capital a business is authorized by its stockholders to issue. It can issue less than that amount, but not more.
Authorized capital does not equal the total value of the investment in a business, it equals the value of the shares.
It is also referred to as authorized share capital, authorized shares, authorized stock, nominal capital, or registered capital.
A part of a business’ authorized capital can often remain unissued – companies like to leave room for the future sale of additional shares in case they need to raise capital rapidly. This amount can be changed by shareholders’ approval.
Most corporations do not sell their whole authorized capital.
The concept of authorized capital was abolished in the United Kingdom under the Companies Act 2006.
Authorized capital contrasts with paid-up capital or outstanding shares, which is the amount of capital the company actually issues and has received payment from selling its shares.
Stock exchanges around the world may require that listed companies have a minim amount of authorized capital. The London Stock Exchange, for example, says a PLC (public limited company) must have a minimum of £50,000 of authorized share capital. A PLC is a British company that is listed on the stock exchange.
In most cases, the capital will be in the form of shares. However, providing money (cash) up to a certain amount may sometimes be classed at authorized capital.
According to the Financial Times Lexicon, authorized capital is:
“The largest amount of capital a company is allowed to have in the form of shares. The amount of equity capital a company is authorized (but not required) by its shareholders to issue. The initial ceiling is stated in a company’s articles of association but shareholders can vote to revise the amount.”
Video – What is authorized capital
This video explains what authorized capital is, as well as how it differs from total investment in a company.