Legal Definitions - stated capital

Stated capital refers to the portion of a corporation's equity that represents the permanent capital contributed by its shareholders when they purchase shares. It is a legally designated amount that, in many jurisdictions, serves as a protective cushion for creditors. This means that, generally, a corporation cannot distribute funds back to shareholders (for instance, through dividends or share repurchases) if doing so would reduce the company's assets below its stated capital, without following specific legal procedures. It essentially represents the foundational investment made by owners that is intended to remain within the company to support its operations and provide a baseline of security for those who lend money to the corporation.

• New Tech Startup Funding: Imagine "Quantum Leap Innovations," a new software company, issues 1 million shares of common stock to investors. Each share has a par value of $0.10, but investors pay $5.00 per share because of the company's promising future. In this scenario, the total stated capital would be $100,000 (1 million shares * $0.10 par value). The remaining $4.90 per share ($4.9 million total) would typically be recorded as "paid-in capital in excess of par" or "additional paid-in capital."
  This example illustrates how stated capital is often tied to the par value of shares, representing a specific, legally defined portion of the initial investment.
• Established Company Issuing No-Par Stock: Consider "Evergreen Resorts Inc.," an established hospitality company, which decides to issue 200,000 shares of common stock with no par value to fund an expansion project. The shares are sold to investors for $75 each. In this case, the company's board of directors might designate the entire $15 million received (200,000 shares * $75) as stated capital, or they might allocate a portion of it to stated capital and the rest to capital surplus, depending on the applicable state laws and their financial strategy.
  This demonstrates that for no-par stock, the board has more flexibility in determining what portion of the proceeds constitutes stated capital, but the principle of setting aside a permanent capital base remains.
• Protecting Creditors During Financial Hardship: "Apex Manufacturing Co." has $10 million in stated capital. Due to a downturn in the economy, the company faces financial difficulties but still has significant outstanding loans from banks. If Apex's board wanted to pay a large dividend to shareholders to maintain investor confidence, state corporate law would likely prevent them from doing so if it would cause the company's net assets to fall below its $10 million stated capital.
  This scenario highlights the primary function of stated capital as a legal safeguard for creditors, ensuring that a minimum amount of shareholder investment remains within the company to satisfy its debts before funds can be returned to owners.