What Is Paid-Up Capital?

What Is Paid-Up Capital?

Let me explain paid-up capital directly to you: it's the equity capital that shareholders have fully paid to the company in exchange for ownership interests. When you as a shareholder buy stock, the money you pay straight to the issuing company becomes paid-up capital. This happens when a company sells its shares on the primary market directly to investors, often through an initial public offering (IPO). But if shares are traded among investors on the secondary market, no new paid-up capital is created because the proceeds go to the selling shareholders, not the company.

Key Takeaways

You should know that the primary market is the only place where paid-up capital is received, usually via an IPO. Funding for it comes from two sources: the par value of stock and excess capital. Paid-up capital is specifically the amount investors pay above the par value of a stock. Overall, it represents equity financing for the company.

Understanding Paid-Up Capital

Paid-up capital, which you might also hear called paid-in capital or contributed capital, comes from two funding sources: the par value of stock and excess capital. Each share has a base price known as its par, typically low, often under $1. Any amount you pay over that par value counts as additional paid-in capital or paid-in capital in excess of par.

On the balance sheet in the shareholders' equity section, you'll see the par value of issued shares listed as common stock or preferred stock. Share capital can show up in different ways: as paid-up capital for funds already received from investors, called-up capital for funds due to the company, or paid-in capital for funds that cover the full purchase price of the shares.

Paid-up capital can signal a company's financial health, as illustrated in diagrams showing its components.

Paid-Up Capital vs. Authorized Capital

When a company wants to raise equity, it can't just sell pieces to the highest bidder; it must get permission by filing with the registration agency in its country of incorporation. In the U.S., companies going public register with the SEC before an IPO. The maximum capital they're allowed to raise through stock sales is called authorized capital. Companies usually apply for more authorized capital than they need right now, so they can sell more shares later if required. Since paid-up capital only comes from actual share sales, it can never exceed the authorized capital.

What Is an Example of Paid-Up Capital?

Here's a straightforward example: if a company issues 100 shares of common stock with a par value of $1 and sells them for $50 each, the shareholders' equity on the balance sheet will show paid-up capital totaling $5,000, made up of $100 in common stock and $4,900 in additional paid-up capital.

What Is Par Value?

Par value is the face value of a stock, listed on the stock certificate and in the company's corporate charter.

What Is Nominal Value?

Nominal value is the same as par value.

What Is Paid-Up Capital Comprised of?

Paid-up capital consists of two parts: the par value of the stock (par value times the number of shares owned by shareholders) plus the excess over par.

Where Is Paid-Up Capital on the Balance Sheet?

You'll find paid-up capital in the equity section of the balance sheet. There are two lines: one for stock par value, and another for the additional paid-up capital over par. The total paid-up capital is the sum of these two.

The Bottom Line

Paid-up capital is money that's not borrowed; it's from selling shares. If a company is fully paid-up, it has sold all available shares and can't increase capital without borrowing or getting authorization for more shares. This figure shows how much the company relies on equity financing for operations, and you can compare it to debt levels to check if the financing balance is healthy based on its operations, business model, and industry standards.