Paid-In Capital: Definition, Advantages, and Disadvantages

Definition

Paid-In Capital can be defined as the amount of cash or other assets that shareholders have given a company in exchange for a certain percentage of ownership within the company.

It can be defined as the resources that have been presented on the company’s balance sheet, followed by payment collections by various different shareholders.

It is referred to as ‘paid-in’ because it has been paid to the company in full.

Paid-in capital is a subset of authorized share capital, which is mostly the capitalization limit set on the company to raise finance (via shareholding).

Therefore, by default, paid-in capital would be lesser than the authorized share capital of the company.

Advantages:

There are numerous advantages of the company having paid-up capital on the balance sheet, and as a resource for raising capital for funds.

Firstly, it can be seen that Paid-In Capital is the amount of finance that does not have to be repaid by the company.

This means that the company has already raised this amount of finance without any payback claim.

Regardless of the fact that these shareholders might have a voting right, or might be paid dividends, yet it can be seen that it is cheaper as compared to other sources of finance that the company has.

Therefore, this tends to be a very important advantage for companies having paid-up capital, which they do not need to bear a financial cost associated with this source of finance.

This means that companies can choose not to raise finance without having to bear finance costs. With debt or other long-term sources of finance, companies need to bear a fixed charge against that particular amount.

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However, in the case of Paid-In Capital, there is no such charge, which makes it cheaper to exercise this option, once the companies have these resources on hand.

Another prominent advantage of Paid-In Capital is the fact that if the company has sufficient Authorized Share Capital, it can issue more shares and increase its paid-up capital at almost no cost.

The inherent costs that are included in this issuance are the cost that is incurred for advertising. This can be a cheaper source of finance for the company if they are already in a financial problem.

In the same manner, increasing paid-up capital does not negatively affect the company’s leveraging position.

The next best alternative to paid-up capital is debt financing. This impacts the leveraging of the company and also impacts their risk profile. Hence, paid-up capital tends to be a safer option for companies.

Disadvantages:

The inherent disadvantage of any increased paid-up capital is the fact that it tends to result in dilution of ownership. In other words, it results in the ownership structures within the organization changing, which might be an issue for existing shareholders.

Therefore, this might result in companies having to structure the share issuing process in a manner that can help retain the interests of the existing shareholders.

Another possible drawback of increasing paid-up capital is the fact that in the case where companies don’t have authorized share capital to utilize, it might be expensive to increase their paid-up capital.

This can be extremely detrimental for the overall cause, because of the reason that it hampers the ability of the company to legally issue more shares to increase their paid-up capital.

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An increase in paid-up capital can also be termed as an irreversible action, because of the fact that it cannot be taken back.

Once shares are issued, the company cannot buy back these shares unless they issue a special category of shares. Therefore, in most cases, it is an irreversible action that stays with the company for the future.

Lastly, paid-up capital can be issued with proper justification of what the finance is required for. If this is not communicated, then there might be uncertainty within the company, and this might result in mixed signals being communicated to the market.

Consequently, it might hamper investor confidence, and this, in return, might result in downward pressure on the stock price.

Conclusion:

Therefore, it can be seen that Paid-Up Capital is a very vital source of funding for the company. Consequently, it can be seen that this has resulted in companies raising a considerable source of finance as a result of investment from various different stakeholders.

Regardless of the fact, an increase in paid-up capital tends to result in ownership dilution, yet there is no doubt to the fact that it inevitably stands to be one of the most convenient and cost-effective financing solutions for the company.

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