The proprietors’ capital in a limited company consists of share capital. When a company is set up for the first time, it issues shares. These are paid for by investors, who then become shareholders of the company. Shares are denominated in units of 50 pence, 1$, 2$ or whatever seems appropriate. This “face value” of the shares is called their nominal value.
A distinction must be made between authorized, issued, called up and paid up share capital.
Authorized or nominal capital
Authorized or nominal capital is the maximum amount of share capital that a company is empowered to issue. The amount of authorized share capital varies from company to company, and can change by agreement.
Issued capital is the nominal amount of share capital that has been issued to shareholders. The amount of issued capital cannot exceed the amount of authorized capital. When share capital is issued, shares are allotted to shareholders. The term “allotted” share capital means the same thing as issued share capital.
When shares are issued or allotted, a company does not always expect to be paid the full amount for the shares at once. It might instead call up only a part of the issue price, and wait until a later time before it calls up the remainder.
Like everyone else, investors are not always prompt or reliable forming an online company payers. When capital is called up, some shareholders might delay their payment or even default on payment. Paid up capital is the amount of called up capital that has been paid.
Shareholders are entitled to a share of the profits made by the company.
Dividends are appropriations of profit after tax.
A company might pay dividends in two stages during the course of their accounting year:
• In mid year, after the half year financial results are known, the company might pay an interim dividend.
• At the end of the year, the company might pay a further final dividend.
The total dividend for the year is the sum of the interim and the final dividend. Not all companies pay an interim dividend. Interim dividends are, however, commonly paid out by public limited companies.
At the end of an accounting year, a companies directors may have proposed a final dividend payment, which has not yet been paid. This means that the final dividend should be appropriated out of profits and shown as a current liability in the balance sheet.
Not all profits are distributed as dividends; some will be retained in the business to finance future projects. The “market value” of the share should, all other thing being equal, be increased if these projects are profitable.