Every company has some type of capital funds reported on its balance sheet which are used to operate and manage the day-to-day operations. These funds can be classified as retained earnings or profits, debt or liability, and paid-up capital. While retained earnings and debt are considered capital accumulated from outside sources, paid-up capital represents funds paid in by owners of the company.
Paid-Up Capital Defined
In its simplest form, paid-up capital means the total amount of funds invested by the initial shareholders. These shareholders are typically the founders of the company, who use the capital for start-up expenses and short-term marketing.
Increasing Paid-Up Capital
When a company needs additional capital to either expand its operations, purchase new equipment or simply pay off existing debt, the method of choice is to issue more shares in the company. That comes with a caveat however. Issuing more shares will dilute existing shareholders' equity interest in the company.
Dilution Solutions for Paid-Up Capital
Share dilution occurs when a company decides to issue more stock in order to raise more capital. A company starts out with one thousand shares of original stock which the founding shareholders have contributed their share of capital or paid-up capital. If the company issues another thousand shares to a new set of investors, the original owners' equity interest will be diluted by 50 percent. A simple solution to avoid dilution would be to issue another class of stock such as preferred. This way creates additional paid-in capital but no dilution issue for the initial shareholders.
Paid-Up Capital in a Limited Partnership
Paid-up capital in a limited partnership is considered capital contributions from limited partners. Unlike a corporation where shares are equal to the percentage of invested capital, in a limited partnership there are two components that an investor will analyze: capital interest and distributing interest. An investor can have 100 percent capital interest or paid-up capital but only have 90 percent distributing interest. Distributing interest is simply the net profit distribution to the investor.