It is very common for company owners to start a company without truly thinking about their paid-up capital. In fact, not many company owners know what paid-up capital is. Simply put, paid-up capital is the amount of money a company has received from its shareholders in exchange for shares of stock. Paid-up capital is created when a company sells its shares on the primary market directly to investors. In simple terms, the company is offering new shares in exchange for cash. In the secondary market, the shares are traded between investors. Therefore no paid-up capital is created because money is handed to the selling shareholders, not the company.
In Singapore, the minimum paid-up capital is $1 per shareholder. Upon incorporation, this paid-up capital must be paid up immediately and this money has to be deposited into the company’s bank account once the account is opened. For example, if there are 2 shareholders and they have a 50% share each of a company with $10,000 paid-up capital, they must each pay $5,000 into the company bank account. This money can then be used to run the company once the company has been set up.
In the unfortunate event that the company is unable to function as a going concern, creditors may lay claim to whatever unused paid-up capital. Having a high paid-up capital would mean that there are more monies to back the company up. This is the reason why there may be a minimum paid-up capital requirement for companies when they bid for government jobs or large contracts. Having a small paid-up capital of say $1 may also be a cause for concern for people dealing with this company.
To understand further, paid-up capital consists of two funding sources. The par value of the stock and the additional paid-up capital. A stock is usually issued at a low base price. Let us assume this to be $1. Any amount that investors pay for the stock above $1 represents the additional paid-up capital or paid-up capital in excess of par. For example, if a company issues 100 shares of stock at a par value of $1 and sells them at $100 each ($10,000 in total), the balance sheet should show paid-up capital totalling $10,000 comprising $100 in common stock and $9,900 of additional paid-up capital.
Paid-up capital is important because it represents money that is not borrowed. A company that is fully paid up has sold all its issued shares. The only way to raise more capital is to borrow money or to get authorisation to sell more shares. Investors and business partners look at the paid-up capital to understand the balance of a company’s operations.
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