Called up share capital; paid in share capital

What Is Called Up (Share) Capital and Paid In (Share) Capital?

In the realm of corporate finance and accounting, called up (share) capital and paid in (share) capital are fundamental concepts that describe the financial contributions shareholders make to a company. These terms, falling under the broader category of share capital, represent different stages of a company's equity financing.

Called up capital refers to the portion of a company's issued shares that shareholders are legally required to pay for, as formally requested by the company. It represents the amount of money the company has demanded from its shareholders for the shares they own, regardless of whether that money has actually been received yet. This mechanism allows a company to raise funds incrementally, calling for payment as needed rather than requiring the full sum upfront.

Conversely, paid in capital (also known as contributed capital) signifies the total amount of money or other assets that a company has received from its shareholders in exchange for its shares of common stock or preferred stock. This figure includes both the nominal or par value of the shares and any amount paid in excess of that par value, often recorded as additional paid-in capital. Unlike debt that must be repaid, paid in capital is a permanent form of equity financing that remains with the company, forming a crucial part of its shareholders' equity.

History and Origin

The concepts of called up and paid in capital trace their roots back to the early development of corporate structures and company law, particularly in jurisdictions like the United Kingdom. Historically, companies were formed by subscribers who agreed to take shares and contribute capital. It was common for the full value of a share not to be paid immediately upon subscription. Instead, companies would "call up" portions of the share price as and when funds were required for operations or expansion.

The legal framework governing these concepts has evolved over centuries. In the UK, for instance, the Companies Act 2006 provides specific definitions for "called-up share capital," clarifying that it includes amounts formally requested from shareholders, whether or not paid, along with any share capital paid without being called or due on a specified future date.⁷, ⁸, ⁹ This legal clarity helps in regulating how companies can manage their capital structure and ensure accountability to shareholders and creditors. The ability to call up capital provided flexibility for growing businesses that needed to conserve initial cash flow while still having a legal claim on promised funds.

Paid in capital, as a direct reflection of investor contributions, has always been a cornerstone of corporate finance, representing the primary external funding source outside of debt financing. Its clear distinction from earned capital (retained earnings) emerged with the standardization of accounting principles aimed at providing transparency in financial statements.

Key Takeaways

• Called up capital is the amount a company has formally requested from its shareholders for their shares, irrespective of whether the payment has been received.
• Paid in capital is the actual cash or assets received by the company from shareholders in exchange for their stock.
• The distinction between called up and paid in capital is crucial for understanding a company's financial liquidity and its shareholders' ongoing obligations.
• These capital components are reported within the shareholders' equity section of a company's balance sheet.
• Effective management of called up and paid in capital is vital for a company's financial health and its ability to fund operations and growth.

Formula and Calculation

While "called up capital" is more a legal and operational concept than a calculable formula, "paid in capital" can be explicitly calculated.

Paid In Capital Formula:

Where:

• Par Value of Issued Shares: The total nominal value of all shares issued to investors. This is calculated as: (\text{Number of Shares Issued} \times \text{Par Value Per Share}).
• Additional Paid-In Capital (APIC): The amount by which the issue price of shares exceeds their par value. If shares are issued at par, APIC is zero.

For example, if a company issues 1,000 shares of common stock with a par value of $1 per share, but sells them for $10 per share, the calculation would be:

• Par Value of Issued Shares = (1,000 \text{ shares} \times $1/\text{share} = $1,000)
• Additional Paid-In Capital = (1,000 \text{ shares} \times ($10 - $1)/\text{share} = $9,000)
• Total Paid In Capital = ($1,000 + $9,000 = $10,000)

Interpreting the Capital Figures

Interpreting called up and paid in capital provides insights into a company's financial structure and its obligations to its shareholders, and vice versa.

A high amount of called up capital that has not yet been paid might indicate a company's strategy to defer cash inflows until needed, or it could signal potential liquidity issues if shareholders are slow to respond to calls for payment. For shareholders, it represents a contingent liability—an obligation to pay funds when requested by the company. This can be a strategic tool for companies, enabling them to access funds from shareholders without resorting to debt financing at potentially unfavorable terms.

Conversely, paid in capital directly reflects the initial financial strength contributed by investors. A substantial amount of paid in capital shows investor confidence and provides a solid financial foundation for the company's operations and expansion. It demonstrates how much external equity has been injected into the business, which is critical for assessing the company's capital structure and its ability to withstand financial shocks. It represents resources that do not need to be repaid, unlike borrowings.

Hypothetical Example

Imagine "GreenTech Innovations Ltd." is a startup that needs to raise capital. The company decides to issue 100,000 ordinary shares with a par value of £0.10 each to a group of initial investors at a price of £2.00 per share.

The terms of the share subscription agreement state that investors will initially pay £1.00 per share, and the remaining £1.00 will be "called up" by the company at a later date when funds are needed for a new product development phase.

• Initial Payment: Investors pay £1.00 per share for 100,000 shares, totaling £100,000. This £100,000 immediately becomes paid in capital. Specifically, £10,000 (100,000 shares * £0.10 par value) is recorded as share capital, and £90,000 (£1.00 initial payment - £0.10 par value) is recorded as additional paid-in capital.
• Called Up Capital (Initial Stage): At this point, the company has called up £1.00 per share. So, the called up capital is £100,000. Since this amount has been paid, the "unpaid called up capital" is £0.

Six months later, GreenTech Innovations Ltd. is ready to begin the new product development. The board decides to "call up" the remaining £1.00 per share from its shareholders. They issue a formal request for this payment.

• Called Up Capital (Later Stage): The company now has called up the full £2.00 per share (the initial £1.00 and the new £1.00 call). The total called up capital is £200,000 (100,000 shares * £2.00).
• Paid In Capital (After New Call): Once shareholders pay this second call, the additional £100,000 is received. The total paid in capital then becomes £200,000. At this point, the shares are fully paid, and there is no outstanding uncalled or unpaid called up capital.

This example illustrates how called up capital represents a potential claim on shareholder funds, while paid in capital reflects the actual cash received, contributing to the company's total shareholders' equity.

Practical Applications

Called up and paid in capital are central to several practical aspects of corporate finance, corporate governance, and regulatory compliance:

• Capital Raising and Flexibility: Companies, especially startups or those in capital-intensive industries, can use the "called up" mechanism to manage their cash flow. Instead of requiring a large lump sum upfront, they can call for payments as project milestones are met or as capital is genuinely needed. This provides financial flexibility and can make share subscriptions more appealing to investors.
• Balance Sheet Reporting: Both called up and paid in capital are crucial items on a company's balance sheet, specifically within the shareholders' equity section. Accurate reporting ensures transparency regarding the company's financial structure and the extent of shareholder contributions.
• Regulatory Compliance: In many jurisdictions, including the UK under the Companies Act 2006, companies are required to maintain detailed records and submit statements of capital to regulatory bodies like Companies House. These statements reflect the company's issued, called up, and paid in capital, ensuring compliance with legal requirements and providing public access to vital company information. For instance, companies ⁶must notify Companies House of changes to their share capital structure, including the allotment of new shares.
• Investor Protectio⁵n and Solvency: For creditors and potential investors, the amount of paid in capital indicates the financial commitment of existing shareholders. This figure is a critical determinant of a company's initial financial strength and its ability to absorb losses before affecting creditors. It also signifies the extent to which shareholders have fulfilled their obligations. In cases of liquidation, the distinction between called up and paid in capital becomes paramount, as shareholders may be liable for any unpaid called up amounts.
• G20/OECD Principles of Corporate Governance: The transparency surrounding share capital, including called up and paid in amounts, aligns with international standards for good corporate governance. Principles advocated by the Organisation for Economic Co-operation and Development (OECD) emphasize the importance of clear disclosure regarding a company's financial situation and ownership, which includes details about its capital structure.

Limitations and Crit², ³, ⁴icisms

While called up and paid in capital serve important functions, they also have limitations and can sometimes be subject to criticism or misunderstanding:

• Complexity: The distinction between various forms of capital (authorized, issued, subscribed, called up, paid in) can be confusing for non-experts, making it difficult to ascertain a company's true financial standing without detailed analysis. This complexity can obscure a company's genuine cash flow position if a large portion of called up capital remains unpaid.
• Shareholder Default Risk: For called up capital, there is an inherent risk that shareholders may fail to pay the requested amounts, particularly during times of financial distress for either the company or the shareholder. If a shareholder does not pay after the company has called up their share capital, the company may take legal action or the shareholder may forfeit their shares. This can leave the compa¹ny with a shortfall in anticipated funds, potentially hindering its operations or expansion plans.
• Limited Applicability in Modern Finance: In many modern corporate finance practices, particularly for publicly traded companies, shares are typically issued as fully paid upon subscription. The practice of having partly paid shares where capital is called up over time is less common for large, publicly listed entities, though it still exists, especially in private companies or specific industries. This can render the "called up" aspect less relevant in certain investment analyses.
• Lack of Reflecting Operating Performance: Paid in capital represents funds from investors, not from the company's operational activities. It does not reflect a company's profitability or operational efficiency, which are captured by retained earnings (earned capital). An entity with significant paid in capital but consistent operating losses may still face long-term viability challenges.

Called Up (Share) Capital vs. Issued Share Capital

The terms called up (share) capital and issued share capital are often confused, but they represent distinct stages in a company's equity structure.

Issued share capital refers to the total nominal value of shares that a company has allotted and released to its shareholders. It represents the maximum amount of share capital that the company has committed to issuing to investors. Once shares are issued, they officially become part of the company's share capital, regardless of whether the full payment has been received.

Called up (share) capital, on the other hand, is a subset of issued share capital. It specifically refers to the portion of the issued shares for which the company has formally requested payment from its shareholders. For example, a company might issue shares with a nominal value of £10, but only "call up" £5 per share initially. In this scenario, the full £10 per share would be part of the issued share capital, but only £5 per share would be the called up capital. The remaining £5 per share would be "uncalled capital," which the company has the right to demand at a later date. Therefore, while all called up capital must be part of issued capital, not all issued capital has necessarily been called up.

FAQs

What is the primary difference between called up capital and paid in capital?

Called up capital refers to the amount of money a company has formally requested from its shareholders for their shares, whether paid or not. Paid in capital is the actual amount of money or assets the company has received from shareholders for their shares.

Why do companies use called up capital instead of requiring full payment upfront?

Companies may use called up capital to manage their cash flow more effectively, allowing them to draw on funds as needed for specific projects or operational requirements rather than demanding a large initial lump sum from investors. This can make investing in partly paid shares more attractive.

Where can I find information about a company's called up and paid in capital?

Details about a company's called up and paid in capital are typically found in the shareholders' equity section of its balance sheet, which is part of its publicly available financial statements. In some jurisdictions, such as the UK, this information is also reported to regulatory bodies like Companies House.

Can a shareholder refuse to pay called up capital?

A shareholder is legally obligated to pay called up capital as per the terms of their share agreement and the company's articles of association. Refusal to pay can result in legal action by the company to recover the funds, or the forfeiture of the shareholder's shares.

Is paid in capital the same as a company's total worth?

No, paid in capital is only one component of a company's financial structure. While it represents the direct investment by shareholders, a company's total worth (market capitalization or enterprise value) also considers its earnings, assets, liabilities, and market perception, which include factors beyond just initial capital contributions.