Everything You Need to Know About Your Company’s Capital Structure

January 31, 2022 by

While filling out your company’s Articles of Incorporation, you’ll notice that Article 7 requires information about your company’s Authorized Capital Stock (ACS), while Article 8 requires you to further break this down to the amount of shares subscribed and paid by each shareholder.

If this is your first time registering a business, you might find this confusing. What does Authorized Capital Stock mean? How is it different from the shares that are “subscribed” and “paid”? What are the values you should be putting in these blanks?

This article will answer all of those questions by taking a look at your company’s capital structure, and the differences between the three types of capital.

What is Authorized Capital Stock?
Authorized Capital Stock refers to the amount of shares your company is allowed to issue if the shares have par value and sell to investors for subscription. It is different from how many have already been issued or sold, as the ACS pertains to the maximum number of shares that the company is able to offer.

This means that the ACS is decided by the company itself, though it is by no means a random number. You’ll have to consider how much of your capital will be reserved for any potential investors where you can reach a favorable deal, so your capital must not be too low. However, a higher ACS means you’ll have much larger filing fees when registering with the SEC, so it must also not be too high.

What is Par Value?
You may have noticed that in filling out the details for ACS, you were asked about par value. This figure refers to the value of a single share of your company, which is determined by dividing the ACS by the number of shares your company offers.

For example, Company X has an ACS of Php100 million distributed among one million shares. This means that the par value would be Php100 per share.

Deciding on your company’s par value goes hand in hand with deciding on its ACS. However, most companies go with a par value of Php1 per share or Php100 per share, so that it’s easy to compute how much a certain number of shares is worth.

While the par value determines how much an investor has to pay in order to purchase or subscribe to one (1) share of the company, that same investor can choose to increase the price when they sell their shares to a third party or even the general public. In those cases, the par value will remain the same, and the selling price of the shares will be its market value.

What is Subscribed Capital Stock?
While Authorized Capital Stock refers to the total amount of shares a company can sell, Subscribed Capital Stock refers to the shares that are issued to the company’s shareholders, which means that those shares already belong to them. Under the Revised Corporation Code, there is no more minimum requirement for Subscribed Capital Stock during incorporation.

In the Articles of Incorporation, this is represented in Article 8 by the columns “Number of Shares Subscribed,” which varies depending on the shareholder, and “Amount Subscribed,” which refers to those shares multiplied by the par value.

In the example above, if Company X has already issued 500,000 shares to their shareholders by the time they incorporate, this makes up the Subscribed Capital Stock of the company, which is worth Php50 million.

What is Paid-Up Capital Stock?
Just as Subscribed Capital Stock is a subset of Authorized Capital Stock, Paid-Up Capital Stock is a subset of Subscribed Capital Stock. As the name implies, this refers to the number of shares that have not only been issued to and sold to shareholders, but have also been paid for. If the company has already received the payment for shares that a certain investor has purchased, that will fall under Paid-Up Capital Stock.

In the Articles of Incorporation, this is represented in Article 8 by the column “Amount Paid,” which refers to how much each shareholder has paid for their shares.

For Company X, if only half of the 500,000 shares have been paid for, then its Paid-Up Capital Stock would consist of 250,000 shares worth Php25 million. The founders of Company X will then have to disclose in their GIS that their Authorized Capital Stock is worth Php100 million, their Subscribed Capital Stock is worth Php50 million, and their Paid-Up Capital Stock is worth Php25 million.

A Footnote on Non-Stock Corporations
The different types of capital stock discussed above only apply to stock corporations, or companies that are designed to sell their shares. Non-stock corporations don’t have to break down their capital structure this way when registering with the SEC.

We hope this article was helpful. If you have any further questions, click here to chat with UNA, and check out the other articles of Unawa Explainer for more information on company incorporation.

January 31, 2022
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