operate a sole proprietorship business is invested by the sole owner of the business. His or her liability is also unlimited. For example Ali wants to start a business and he needs $1o,ooo. The $10,000 is actually the capital which he wants to invest for starting a business. Only Ali providing the capital to start and operate the business so it is sole proprietor ship and 10,000 is the capital in sole proprietor ship In partnership form of business the money needed to start and operate a business in contributed in agreed upon proportions by the partners. The liability of the business is limited to the extent of capital contribution of each partner. For example Momen and Hamza want to start a combine business with $12000 and both of them provide the required capital by mutual contribution then its called partner ship and the shared amount of money is capital in partnership, like they contribute $6000 each which equal to (6000+6000)=$12000, here the $12000 is capital in partnership The capital of the companies comes from the investment made by the public by purchasing shares of the company.
The shareholders are distributed some
amount of profit as a result of the companys operations. For example when more than one person want to invest their money in a business for the purpose of getting profit, then it is called Capital in companies, in private companies the minimum number of share holders is 2 and maximum is 50, while in public companies the minimum number of share holders is 7 and maximum is unlimited, so the combine amount of money of all these share holders is capital in a company. Initial Public Offering Authorized Capital Issued and Unissued Capital Subscribed Capital Over Subscription Under Subscription Paid up Capital When a company sells its shares for the very first time to the public.
It is also known as primary market.
For example Itesalat Telecom offer 25 @ $1000 per share, to public for the first time then it is called initial public offering. The maximum amount of money that a company can raise by selling shares to public. The company cant sell shares more than the authorized limit. Since this amount is registered with the registrar of the companies therefore it is also called registered capital. For example Itesalat wants to raise funds by issuing 30 shares at $1000 per share but the legal limit is 25 for them. So they can raise a fund of $25000 because it is legally allowed or authorized. Now the $25,000 is authorized capital. The amount of capital that a company issues out of its authorized limits to the public for investment is called issued capital. For example Itesalat Telecom issue 18 share to raise funds of $18,000.Here the 18 shares are issued capital. Unissued capital is the capital which is not issued. If we see Itesalat issued 18 shares out of 25 and 7 are Unissued ,here the 7 shares are The amount of capital subscribed by the public or purchased planned by people.
Over subscription: if the number of applicants
are more than the number of shares this situation is known as oversubscription. Under subscription: if the number of applicants are less than the number of shares this situation is known as under subscription. The capital which is subscribed to the buyer and transferred in their name. OR the shares which are sold out by the company is called paid up capital. For example when the Itesalat Telecom offers 25 share in the market and they succeed to sale 20 share to raise funds of 20,000. then it is called paid up capital. Share is a financial instrument which is used by the joint stock companies to get funds from the financial markets.
The share holders get the dividend as reward of
their investment in a company.
The shares of a company may be;
1. Ordinary shares( Common stocks) 2. Preferred shares: 3. Deferred shares: Common shares or Ordinary shares: these shares are also known as equity shares. The holders of ordinary shares are the real owners of a company. The ordinary share holders have voting rights. They receive divided from the profit of the company. The equity share capital can not be redeemed during the life time of the company. Merits of Ordinary or Equity shares: 1. Venture capital: ordinary shares are the most important and popular type of shares it is therefore, called as venture capital of the company. 2. No burden on company resources: Since the profits are to be paid out of the company, therefore it imposes no burden on the resources of a company. 3. Provision of long term finance: the ordinary shares provide long term finance to a company. 4. Rate of dividend: the rate of dividend on ordinary shares depends upon the profit of the company. 2. Preferred shares: Preferred share as the name suggests have some preferences as compared to other types of shares. The main preferences of these shares are a) Preference in dividend payment: b) Preferences in repayments of capital 3. Deferred shares: Deferred shares are also known as founders shares. They issued to the promoters of the company and the dividend on these shares are paid to them after all the dividends of all share holders are paid. The term debenture is derived from a latin word debere which means to have a debt. A company may raise part of its capital by obtaining loans. The short term capital is mostly met by the company from banks in the form of cash credits. The long term finances may be raised by issuing debentures and shares. Thus debenture like share is along term finance generated by company through public borrowing. Definition: Debenture is a security issued to the investors under the seal of the company who becomes creditors of the company. Or It is document which is issued by the company as an evidence of its debt. Features of debentures: the main features of debenture are 1) it shows the debt of a company 2) it has a nominal value like shares 3) it is a document issued under the seal of the company 4) fixed rate of interest: Types of debentures: 1) Ordinary or naked debenture: Ordinary or naked debentures are those which do not carry any security for interest and principal amount . OR Ordinary or naked debentures are those which do not carry any sec in respect the repayment of interest or the principal. These have no priority and stand in the same position as any other unsecured creditors at the time of winding up the company. 2) Mortgage debenture: A mortgage debenture is one which is secured by a mortgage. Mortgage means the real property of the company If the company fails to repay the borrowed amount at a specified period, the debenture holder has a legal right to sell the property and recover the loan. 3) Redeemable debentures: the debentures which are repayable after a certain period are called redeemable debentures. The company mostly borrows money on redeemable debentures. 4) Irredeemable debentures: A debenture which is not payable during the life time of the company is know as irredeemable debentures. These are payable when the company is winding up. 5) Registered debentures: A registered debenture is issued in the name of the owner on the debenture. The name of the owner thus appears on the face of the bond. 6) Convertible debentures: in certain cases, the company allows the debenture holders to convert their debentures for the shares of the company. If he or she converts his debentures into shares he or she becomes the owner of the company. The following are the main difference between a debenture and a share: A person having the debentures is called debenture holder whereas a person holding the shares is called shareholder. Debenture holder is a creditor of the company and cannot take part in the management of the company while a shareholder is the owner of the company. It is the basic distinction between a debenture and a share. Debenture holders will get interest on debentures and will be paid in all circumstances, whether there is profit or loss will not affect the payment of interest on debentures. Shareholder will get a portion of the profits called dividend which is dependent on the profits of the company. It can be declared by the directors of the company out of profits only. Shares cannot be converted into debentures whereas debentures can be converted into shares. Debentures will get priority is getting the money back as compared to shareholder in case of liquidation of a company. There are no restriction on issue of debentures at a discount, whereas shares at discount can be issued only after observing certain legal formalities. Convertible debentures which can be converted into shares at the option of debenture holder can be issued whereas shares convertible into debentures cannot be issued. There can be mortgage debentures i.e. assets of the company can be mortgaged in favor of debenture holders. But there can be no mortgage shares. Assets of the company cannot be mortgaged in favor of shareholder