Nominal capital

Nominal capital, also known as authorized capital, is the maximum amount of share capital that a company is authorized to issue to shareholders.
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Updated: Jun 26, 2024

3 key takeaways

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  • Nominal capital represents the maximum value of shares that a company can issue as stated in its corporate charter.
  • It does not necessarily indicate the amount of capital currently issued and paid up by shareholders.
  • Adjustments to nominal capital typically require shareholder approval and regulatory compliance.

What is nominal capital?

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Nominal capital, often referred to as authorized capital, is the total value of shares that a company is permitted to issue to shareholders as specified in its corporate charter or articles of incorporation. This amount sets an upper limit on the potential equity financing that a company can seek from its shareholders. It provides a framework within which the company can raise funds through the sale of shares.

The nominal capital figure is significant during the formation of a company and may be adjusted as the company grows or changes its financial strategies. However, it is important to note that nominal capital is not necessarily equal to the amount of capital that has actually been issued and fully paid up by shareholders. The issued capital can be less than or equal to the nominal capital but cannot exceed it without amending the corporate charter.

Components of nominal capital

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Nominal capital can be broken down into a few key components:

  • Authorized shares: These are the maximum number of shares that a company is allowed to issue.
  • Par value: This is the nominal value of each share, which may be a fixed amount such as $1 per share.
  • Total nominal capital: This is calculated by multiplying the number of authorized shares by the par value of each share.

For example, if a company has authorized 1,000,000 shares with a par value of $1 each, its nominal capital would be $1,000,000.

Importance of nominal capital

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Nominal capital serves several important purposes in corporate finance and governance:

  • Regulatory compliance: It ensures that the company complies with legal requirements regarding the issuance of shares and the maintenance of adequate capital.
  • Investor confidence: By specifying a limit on the number of shares that can be issued, it provides a measure of transparency and control, which can enhance investor confidence.
  • Financial planning: It allows the company to plan its capital structure and financing needs, providing a framework for raising funds through equity.

Adjusting nominal capital

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Adjustments to nominal capital are often necessary as a company evolves. These adjustments typically require the approval of the company’s shareholders and compliance with regulatory procedures. Common reasons for adjusting nominal capital include:

  • Raising additional funds: If the company needs to raise more capital than initially authorized, it can seek shareholder approval to increase the nominal capital.
  • Mergers and acquisitions: Adjustments may be required to accommodate new shares issued in connection with mergers or acquisitions.
  • Stock splits: Companies may adjust nominal capital to reflect changes in the number of shares resulting from stock splits or reverse splits.
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If you found the concept of nominal capital interesting, you might also want to explore these related topics:

  • Issued capital: The amount of capital that has actually been issued to shareholders.
  • Paid-up capital: The portion of issued capital that shareholders have paid for.
  • Shareholder equity: The residual interest in the assets of the company after deducting liabilities.
  • Corporate charter: A legal document that establishes a corporation and outlines its structure and purpose.
  • Equity financing: The process of raising capital through the sale of shares in a company.

Understanding nominal capital is essential for grasping how companies structure their equity and raise funds, providing a foundation for further exploration of corporate finance and governance.



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Arti
AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.