Capital structure - limited liability company

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Capital structure of a limited liability company

The owners' capital in a limited liability company consists of share capital. 

When a company is originally set up, it issues shares. 

These are paid for by investors, who then become shareholders of the company. Shares are issued in units of 10 cents, 25 cents, 50 cents, $1 or even $2. 

The 'face value' of the shares is called their par value or nominal value

e.g. 100,000 shares of $1 each par value were issued at $1 each.

However, shares may be issued at a price higher than their par value
e.g. the company may issue 20,000 shares of $1 each at $1.25 per share.
 
This excess over the par value is called share premium.

  1. Authorised capital is the maximum amount of share capital that a company is empowered to issue. 

    The amount of authorised share capital can change by agreement. For example, a company's authorised share capital might be 10,000,000 ordinary shares of $1 each.

  2. Issued capital is the amount at nominal value of share capital that has been issued to shareholders. 

    This amount of issued share capital cannot exceed the amount of authorised capital. 

    Therefore, the company with authorised share capital of 10,000,000 ordinary shares of $1 might have issued 6,000,000 shares. 

    It may issue 4,000,000 more shares at some time in the future.

  3. Called-up capital. When shares are issued, a company may not always be paid the full amount for the shares at once. 

    It might call up only a part of the issue price, and wait until a later time before it calls up the remainder. 

    For example, if a company issues 6,000,000 ordinary shares of $1, it might call up only, say, 80 cents per share. 

    Although the issued share capital would be $6,000,000, the called-up share capital would only be $4,800,000.

  4. Paid-up capital. When capital is called up, some shareholders might delay their payment (or even default on payment). 

    Paid-up capital is the amount of called-up capital that has been paid. 

    For example, if a company issues 6,000,000 ordinary shares of $1 each, calls up 80 cents per share, but only receives payments of $3,600,000, the capital not yet paid up would be $1,200,000 (4,800,000 – 3,600,000)

NotesQuizObjective Test