As April 1st nears, a lot of people are gearing up to get their Companies incorporated. And a question we get asked a lot is what the authorized capital of your company must be.
But first, what is “Authorised Capital”
Authorised capital, as the name suggests, is the value of shares which you are allowed to issue. If your authorized capital is Rs. 1 lakh, you can issue shares of upto Rs. 1 lakh. These can be 10000 shares of Rs. 10 each, 1000 shares of Rs. 100 each or any other value which you have in mind. (we normally recommend 10000 shares of Rs. 10 each).
So what are the legal rules regarding Authorised Capital?
The only real rule is that the authorized capital has to be at least Rs. 1 lakh for a Private Limited Company in India today. Anything more than Rs. 1 lakh and the Stamp Duty which you have to pay to incorporate your Company increases, and you have to pay this at the time of incorporation itself.
There is no other rule regarding Authorised Capital as such.
What should I keep my Authorised Capital as?
We typically recommend that you keep an authorized capital of Rs. 1 lakh to reduce the Start-up costs and the cost of the incorporation, overall.
What if I / an investor wants to invest more than Rs. 1 lakh?
This is a common misconception. People believe that having an authorized capital of Rs. 1 lakh prevents them from investing more than Rs. 1 lakh in the business. Nothing could be farther from the truth. Even with an Authorised Capital of Rs. 1 lakh, you can definitely invest a lot of money in your computers, technology, salaries and other expenses.
And if an investor wants to come into your Company with an investment of Rs. 1 crore, it does not mean that you are stuck. You can increase the authorized capital, or sell a stake (say 10%) at a higher valuation per share. A 1 crore investment for a 10% stake makes your Company worth Rs. 10 crore, and each of the 10,000 shares is now worth Rs. 10000. That’s pretty awesome.
Does it mean that I need to have 1 lakh in my bank account while starting my Company?
No, this is another common misconception. You can start a company with Rs. 1 lakh share capital with your account having a minimum balance, say Rs. 10,000 rupees.
But at the time of filing your first annual returns, the Share Capital will show as a “liability” in your books, so you need to show corresponding assets worth Rs. 1 lakh. This could be any of the assets which the Company is using, and even includes intangible assets such as your Trademarks.
About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more.]
» More Legal Resources for Startups