Authorized shares: Overview, definition, and example
What are authorized shares?
Authorized shares refer to the maximum number of shares that a company is allowed to issue as specified in its corporate charter (also known as articles of incorporation or certificate of incorporation). These shares represent the total potential ownership in the company and can be used for various purposes, including raising capital, issuing to employees, or acquiring assets. The number of authorized shares is determined when the company is incorporated, and it can be increased or decreased through a formal process that typically requires shareholder approval.
For example, a company may authorize 1 million shares, but only issue 500,000 shares to shareholders. The remaining 500,000 shares are available for future issuance.
Why are authorized shares important?
Authorized shares are important because they set a limit on the number of shares that a company can issue. This number provides a framework for the company’s equity structure and impacts ownership distribution, voting rights, and the company’s ability to raise funds through new stock issuance. The authorized share limit also helps prevent dilution of ownership, as issuing too many shares without a clear plan can affect the value of existing shares and control of the company.
For businesses, understanding the concept of authorized shares is crucial for planning stock issuance, structuring ownership, and maintaining control of the company.
Understanding authorized shares through an example
Imagine a startup company that incorporates and authorizes 1 million shares. Initially, the company issues 300,000 shares to the founding team and investors, leaving 700,000 shares unissued. Later, the company can issue additional shares, either to raise more capital or to offer stock options to employees, without needing to amend its charter.
In another example, a public company may have authorized 100 million shares, but only 75 million are issued and outstanding. The company can still issue the remaining 25 million shares in the future to raise capital or for other purposes.
An example of an authorized shares clause
Here’s how an authorized shares clause might look in a contract or corporate governance document:
“The Company is authorized to issue a maximum of [Insert Number] shares of common stock, subject to applicable laws and regulations. The Board of Directors may issue shares up to this authorized limit, subject to the terms and conditions of the Company’s charter and shareholder approval, if required.”
Conclusion
Authorized shares represent the total number of shares a company can issue and are essential for structuring ownership and planning for future growth. They provide flexibility for raising capital, compensating employees, and ensuring that the company has enough shares to meet its strategic objectives.
By understanding and clearly defining authorized shares in the company’s charter and agreements, businesses can effectively manage their equity structure and avoid potential issues with dilution or shareholder rights.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.