Sometimes known as authorized share capital or nominal capital, authorized capital includes the funds or capital that a business or other type of organization is allowed to utilize in the ongoing operation of the entity, according to the terms found in the constitutional or founding documents of the organization. The term is also sometimes used to refer to the maximum amount of funds that may be issued to shareholders within a specified period of time. Typically, that maximum amount is not exhausted, allowing the company to avoid the possibility of undergoing unusual levels of financial hardship as the result of providing benefits to shareholders. In both scenarios, the idea behind authorized capital is to control the allocation of funds so that the business has a better chance of remaining viable and able to provide long-term benefits to its shareholders as well as continue providing goods and services to its clientele.
The provisions that govern the structure of an authorized capital arrangement are found in the constitutional documents that currently govern the business. Often, the specific stipulations are placed within the text of documents known as Articles of Association. The exact amount is often expressed in terms of the currency used in the nation where the company is based.
As it relates to shareholders, authorized capital is more commonly referred to as nominal capital. In this application, the term refers to the amount of funds or capital that the company can extend to shareholders. Typically, the capital will be in the form of shares of stock, although providing cash up to a certain amount is also classified in this manner. The provisions that help to determine the maximum amount of capital involved must meet specific criteria set by government agencies that oversee investing and trading activity within the country of origin.
Within the scope of the maximum amount of authorized capital that may be issued for business purposes or as stock to shareholders, most companies will elect to only use a percentage of that maximum. This approach helps to prevent a business from draining resources that could be called upon to protect the value of those issued shares, and also to keep the company viable during a temporary downturn. When and as the condition of the company merits the action, additional shares can be issued to stockholders, up to the maximum amount specified in the Articles of Association. This action can sometimes be in the best interests of the company, since a controlled release of additional shares can help to strengthen the market value of all the issued shares.