Nominal capital, also known as authorized capital or registered capital, refers to the maximum amount of share capital that a company is authorized to issue to shareholders, as specified in its charter or articles of association. This value is “nominal” because it does not necessarily reflect the actual capital that the company has raised from its shareholders, but rather it’s the maximum limit to which the company can raise capital through issuing shares.
Nominal capital is divided into shares of a fixed nominal value (also known as par value), and the company can decide to issue a part or all of these shares to raise capital. The portion of the nominal capital that has been issued to shareholders in exchange for cash or other assets is referred to as issued capital.
For example, if a company’s articles of association authorize it to issue a maximum of 1 million shares with a nominal value of $1 each, the company’s nominal capital is $1 million. If the company has only issued 500,000 of these shares, then the issued capital of the company is 0,000, and it can still issue more shares up to its nominal capital to raise additional funds.
However, it’s essential to note that the rules and terminologies regarding share capital can vary significantly across different jurisdictions, and companies can also issue shares with no par value. Therefore, the specific details might differ depending on the company’s country of incorporation and its specific corporate structure.
Example of Nominal Capital
Imagine a company named TechStart Inc. When the founders established TechStart Inc., they stated in their articles of incorporation that the company’s nominal capital (or authorized capital) is $1,000,000, divided into 1,000,000 shares with a nominal (or par) value of $1 each.
This means TechStart Inc. is authorized to issue up to 1,000,000 shares to raise capital. However, this doesn’t mean that TechStart Inc. has to issue all of these shares immediately or at all.
Let’s say TechStart Inc. initially decides to issue 200,000 shares to its early investors. At the nominal value of $1 per share, this means TechStart Inc. has raised $200,000 in capital from these shares, which becomes its issued capital.
However, TechStart Inc. still has 800,000 shares that it can issue in the future as it needs more funding. So, while the issued capital of TechStart Inc. is currently $200,000, its nominal capital remains $1,000,000, providing the company with the flexibility to raise more capital in the future as its business grows and additional funding is needed.
This example is a simplification and doesn’t include various other factors that might be involved in real-world scenarios, such as share premium, shares issued at discount, and additional paid-in capital, among others. Additionally, rules and practices can vary by jurisdiction, so companies would typically work with legal and financial advisors to manage their capital structure.