For starting a business, a paid-up capital, also called paid-in capital is usually the amount that an entrepreneur needs to invest in a business. In most cases, this required amount is specified in an economy’s commercial code or company law. It is the amount of money pumped in by shareholders in exchange for shares or stock of an entity. When a company wants to raise equity, it cannot simply sell stock of the company to the highest bidder. Businesses must request permission to issue public shares by filing an application with the agency responsible for the registration of companies in the country of incorporation. Paid up capital is also referred as contributed capital including two funding sources – the par value of stock and excess over par. Deriving equity from balance sheet comes to the following calculation:
Paid up capital = par value of stock + excess over par
Paid-up capital represents the extent to which it depends on equity financing to fund its operations which can be compared with the company’s level of debt to assess for a healthy balance of financing, its operations and industry standards. Mentioned below are some crucial concepts regarding paid-up capital while incorporating your business:
Paid-capital requirement for private and public limited companies
Earlier every private company had a minimum paid-up capital requirement of INR 1 lakh whereas for public limited company minimum INR 5 lakhs were required. However, with effect from May 29, 2015, the limits have been omitted and no minimum amount needs to be invested in the company by the shareholders to commence a business, thereby lowering the costs to entrepreneurs to operate in the formal sector.
Withdrawal of paid-up capital
Once the money is loaded into your company as paid-up capital, it becomes part of your company which can be utilized for valid business purposes only. You cannot withdraw that amount for your non-commercial expenses. If in case you withdraw that amount from the bank account of the company for personal expenses, it will be treated as a loan from the company.
Increasing paid-up capital
Paid-up capital of a company can be increased by following a standard procedure, keeping all the parties concerned in loop and after taking prior approval wherever required.
- Verifying Article of Association (AOA) of the company
Verify AOA to ensure provisions in the AOA explicitly permit increasing paid-up capital of your entity. If no such provisions are available, the entity must first make changes to the AOA of the company.
- Convene board meeting
Conduct a board meeting to fix time, date and place for an extra-ordinary general meeting (EGM) obtaining approval of shareholders for increment of paid-up capital and making changes to Memorandum of Association (MOA).
- Extra-ordinary general meeting
As per the provisions of section 61(1) of Companies Act 2013, an ordinary resolution for increment or alterations in authorised share capital is to be passed.
- Registrar of companies (ROC) form documenting
Form SH-7 is filed with ROC with recommended charges for modifying MOA of the company.
It is believed that minimum capital requirements significantly hinder entrepreneurship which sometime also fail to serve the purpose for preventing customers and creditors from expeditiously establishment and potential insolvent firms. Despite these shortcomings, it continued to be a reality for many economies. But every year more economies slash or eliminate how much money entrepreneurs must deposit to start businesses. Various other relevant steps can be initiated to protect investors and creditors and minimizing bankruptcy risks which safeguards the interests of the consumers.
If you are looking for assistance to kick start your business and wish to gather more information about paid up capital requirements or compliances associated with it to refine your business strategies, our team of experts can assist you throughout the process.
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