Contributed Capital

What is contributed capital?

Contributed capital refers to the cash or other assets shareholders pay a company to buy and hold stock. It is also referred to as paid-in capital. These shares must be purchased directly from the issuing company, not through third parties or investors buying and selling amongst themselves. The total value of contributed capital represents the investor’s company ownership. When companies balance their finances, contributed capital is present on the balance sheet under stockholder equity.

If a shareholder pays more than the value of the stock, that’s often referred to as additional paid-in capital.

Companies often turn to accounting software to manage or keep track of shareholders' equity of potential assets. These tools help organizations stay organized, assist in automating invoices, and create accurate financial statements. 

Types of contributed capital

People give companies many different kinds of contributed capital in exchange for stock. These types are:

• Direct listings
• Initial public offerings (IPOs)
• Direct public offerings
• Secondary public offerings
• Issues of preferred stock
• Fixed and current assets like land, property,or  equipment
• Intangible assets like patents, trademarks, copyrights, and goodwill
• Reduction of liability

How to calculate contributed capital

Contributed capital is calculated using the following formula:

For example, if someone pays $2,000 in common stock and $1,000 in additional paid-in capital, the total line item for contributed capital would equal $3,000.

It’s important to note that contributed capital doesn’t represent all of a company’s equity transactions or value.

Benefits of contributed capital

Reasons why companies should consider receiving contributed capital from investors and shareholders include:

• Minimal risk to the company because no collateral from the company is required to grow capital through shareholder equity.
• Increased contributed capital can result in even more contributed capital because a high value shows other shareholders that the company is worth investing in.
• No legally required payback or repayment plan for contributed capital, indicating a very low risk for the company.
• Being able to use the funds however they wish, whenever they wish.
• The potential for the contributed capital to be considered a permanent and continuous source of financing and equity.

Downsides of contributed capital

As with many financial and investment concepts, some downsides of contributed capital exist for both companies and shareholders. Some of these downsides are explained below:

• There’s no guarantee of a return on investment for shareholders, especially for startups or smaller businesses.
• The more contributed capital grows, the less value each share has, and consequently, the less ownership or stake in a company each shareholder has.
• Overall cost of equity is often higher for a company than debt financing and other forms of financing.

Contributed capital vs. common stock vs. earned capital

Contributed capital is the money that people pay in exchange for shares of a company’s stock. It’s sometimes referred to as paid-in capital.

Common stock is a part of the contributed capital that specifically represents the par value price of a company’s stock.

Earned capital is the money from the company’s net income for the indicated time period. It’s sometimes referred to as retained capital or earnings. Combining earned capital with contributed capital results in the total shareholder equity.