Have you ever wondered how corporations raise funds, allocate shares, and manage financial risks? When it comes to understanding how businesses operate, delving into the intricate details of the capital structure is essential.
At its core, the share capital structure refers to the composition of a company's capital. Picture it as a jigsaw puzzle, where each piece represents a share. These shares are tangible expressions of financial contributions and willingness to take risks in the pursuit of profits.
In this blog, we'll break down the components of capital structure and unveil the mechanisms that drive the financial framework.
The Authorized Capital
Let's start by exploring the authorized capital. This refers to the maximum amount of capital a corporation is legally permitted to issue. The articles generally set out this number, which often has no limit unless stated otherwise.
It encompasses various categories of shares, each with its own set of rights, and restrictions. In the case of a corporation constituted under the Quebec Business Corporations Act, the categories of shares can have a nominal value assigned to each share. For example, ABC Inc. has three classes of shares, and one of its classes has shares with a nominal value of $10 each.
The Subscribed Capital
The subscribed capital refers to the portion of authorized capital that individuals or entities offer to acquire from the corporation.
For example, imagine another company, XYZ Inc.’s authorized capital is 5,000 shares valued at $10 each. If interested parties express their intention to acquire 2,000 shares, the subscribed capital would amount to $20,000.
The Issued Capital
Now, let's explore the issued capital, which represents the portion of subscribed capital that the corporation accepts and allots to the subscribers. Typically, the issued capital matches the subscribed capital, but in some cases, a corporation may choose to accept only a portion of the subscription offer.
Going back to the above example, if XYZ Inc. fully accepts the subscription offer, the issued capital would equal the subscribed capital, totalling $20,000.
The Paid-Up Capital
The paid-up capital refers to the portion of the issued capital that has been paid to the corporation by the shareholders. Generally, corporations require full upfront payment, resulting in the paid-up capital being equal to the issued capital.
However, under certain circumstances allowed by the law, corporations may accept partially paid-up shares. In such cases, the subscribers become debtors to the business, owing the difference between the issued capital and the paid-up capital. This is where the concept of a call for payment comes into play.
The Stated Capital and Issued and Paid-Up Capital Accounts
While we're on the topic of capital accounts, let's explore the concept of stated capital and issued and paid-up capital accounts. The stated capital is unique to corporations constituted under the Canada Business Corporations Act and represents the total amount paid for the shares issued by the corporation. It consolidates separate stated capital accounts for each category or series of shares. The issued and paid-up capital account is specific to Quebec corporations and mirrors the federal stated capital account. It subdivides capital by share categories and records the amount of issued and paid-up capital for each category.
It's important to note that any amount received by the corporation in exchange for its shares is considered capital. However, there are exceptions. For shares with a nominal value, the deposited amount cannot exceed this value. In cases where shares have no nominal value, it is permissible to deposit only a portion of the consideration received, as outlined in specific circumstances provided by the law.
Understanding the intricacies of capital structure empowers investors, shareholders, and stakeholders to make informed decisions. It provides insights into a corporation's financial resources, the rights and restrictions associated with different share classes, and the potential risks involved.
So, the next time you come across terms like authorized capital, subscribed capital, or paid-up capital, you'll have a solid foundation to unravel the mysteries behind a company's financial framework. Capital structure is not just a jumble of numbers and terms; it's the key to comprehending the financial backbone of companies.
If your corporation is facing challenges related to capital structure, such as issuing or allotting shares, dealing with unpaid capital, or any other complexities, we are equipped to handle such matters. Don't let financial hurdles hinder your business; contact us today for effective solutions.