The Big Mistake Founders do about Authorised Capital of a Company during incorporation
Curtain-raising, what should the authorized capital of a company during incorporation should be?
Authorized Capital of a company during incorporation is the maximum amount of share capital that a company can issue to shareholders and this is the money Founders or Co-founders during the registration of the startup must authorize.
When you look at the minimum amount of authorized capital for private limited companies and OPCs is INR 1 lakh. And for anything above that you will be paying a stamp duty of INR 400/- and as per the amendment in Companies Act 2015, there is no minimum requirement of paid-up capital to start a Private Limited Company. Also, did you know MCA has laid down certain guidelines when it comes to minimum authorized capital? Certain words can lead to change in the authorized capital of a company.
Happy Fundraising days:
When the company grows, you tend to increase the authorized share capital to allocate your external investments.
To increase the authorized capital, you will have to pay a fee to MCA:
For Each Lakh of additional share Capital, INR 1 Lakh to INR 5 Lakhs; Charges per lakh of Authorized Capital is INR 4000/-
For each lakh of additional share Capital, INR 5 Lakhs to INR 50 Lakhs; Charges per lakh of?authorized Capital is INR 3000/-.
For each lakh of additional share Capital, INR 50 Lakhs to INR 1 Crore; Charges per lakh of Authorized Capital is INR 1000/-.
For each lakh of additional share Capital, Above INR 1 Crore; Charges per lakh of?authorized Capital is INR 750/-.
Now, coming to the Climax (or the holy crime):
Having said that there is nothing called minimum paid up capital, still 95% of the entrepreneurs register an authorized capital of only INR 1 lakh thinking to save INR 400/- When the days of happy fundraising happens, entrepreneurs, to issue shares to the investors, you end up increasing the authorized share capital by spending in the range of INR 6,000/- to 8,000/- (inclusive of professional fee) Wouldn’t it be much simpler, that during incorporation, you just register your authorized share capital as INR 10 Lakhs, and paid up capital as INR 1 Lakh (as is the general practice) by paying a small additional stamp duty of INR 400/- Then on, while raising fund (in common stocks), no increase in share capital will be needed ending into a saving of INR 6,000/- to INR 8,000/-. Come on Cash is always the king!
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