Many of the Entrepreneur’s starting a new private limited company are uncertain about the concept of authorised capital and are often times unsure on the amount of authorised capital they should start their new private limited company with. In this article, we answer one of the most frequently asked question from Entrepreneurs, how much authorised capital is required to start a new private limited company?
Authorised Capital Vs. Issued Capital
When a Private Limited Company is incorporated, the promoters of the company must decide on the amount of authorised capital for the company and the value of shares they will receive in return for their investment in the company. Authorised capital of a private limited company is the maximum value of shares a company can allot to its shareholders. Issued shares or outstanding shares on the other hand, is the amount of shares issued by the private limited company to its shareholders. The issued or outstanding share capital of a company can never exceed the authorised capital of a company.
Charges for Additional Authorized Capital
Currently, the Ministry of Corporate Affairs (MCA) charges a fee of Rs.5,000/- for allotting the minimum authorised capital of Rs.1 lakh for a private limited company. In case the private limited company requires additional authorised capital, fee for the additional authorised capital is charged as follows:
Minimum and starting authorised capital of Rs. 1 lakh: Rs.5000
- For each lakh of additional share capital from Rs.1 lakh to Rs.5 lakh, Rs.4,000 per lakh of Authorised capital.
- For each lakh of additional share capital from Rs.5 lakh to Rs.50 lakh, Rs.3,000 per lakh of Authorised capital.
- For each lakh of additional share capital from Rs.50 lakh to Rs.1 crore, Rs.1,000 per lakh of Authorised capital.
- For each lakh of additional share capital from Rs. Rs.1 crore, Rs.750 per lakh of Authorised capital.
If the promoters of a private limited company wish to issue shares commensurate to the value of investment in the Company, a significant fee would be payable to the Ministry of Corporate Affairs for increasing the authorised capital of the company.
Authorised Capital for Startups
Majority of the startups today are bootstrapped and are unable to pay a significant amount of fee to the Ministry of Corporate Affairs for incorporation of a company with an authorised capital commensurate to the investment in the company. Therefore, most promoters incorporate their company with the minimum required authorised capital of Rs.1 lakh and issue shares with a value of Rs.1 lakh or less to founding members. The rest of the capital invested by the founding members in the Private Limited Company is classified as either unsecured loan or share application money or share premium, thereby reducing the need to increase the authorised capital of the company during the startup and growth stages.
Once, the private limited company starts scaling-up operations and/or requires in the form of debt or equity, authorised capital of the company is raised and additional shares are issued to the founding members commensurate to their investment in the company. Therefore, it is acceptable for most startups to start their operations with the minimum authorised capital of Rs.1 lakh and then increase the authorised capital of the private limited company as the necessity for debt or equity funding arises.