What are Authorized Shares?

A business is capitalized by capital contributions from shareholders and retained earnings from operations. Shareholders receive shares of the corporation (representing an ownership interest in the corporation) in return for their contributions. To distribute shares, the corporation must authorize those shares. This is done in the articles of incorporation. 

The articles will simply state how many shares are authorized for distribution by the board and the classes of authorized shares. Subsequently, the board of directors will distribute those shares as part of a subscription agreement (agreement to invest funds in exchange for stock shares) or pursuant to a stock compensation plan to employees of the corporation.

The requirement that the articles of organization authorize the classes and number of shares is a state law designed to protect shareholders. Shareholders must vote to change the articles of incorporation. It cannot be done unilaterally by the board. 

While the board may vote to issue any of the authorized shares, it cannot go further than that. This protects shareholders against dilution of their ownership interest by board action beyond issuance of the authorized shares.

Back to: Business Transactions

How Many Shares should a Corporation Authorize?

There is no required or set number of shares to authorize. Corporations will use the authorized shares in future rounds of equity offerings and for employee compensation. It is important to offer enough shares to fulfill these objectives.

One thing to account for is that some states assess franchise taxes based upon the number of shares authorized.

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Related Topics

• Corporate Governance Law (Intro)
• What is Business Governance?
• Berle-Means Thesis 
• Corporate Governance Rating Definition
• Who are the members of a corporation?
• Corporate Charter
• Shareholder Register
• Common Stock
• Preferred Stock
• Par Value
• Authorized Shares
• Issued Shares of Stock
• Unissued Shares of Stock
• Outstanding Shares
• Institutional Shares
• Dual Class Shares
• What is a closely-held corporation?
• Close Corporation Plan Definition
• What is a Private Company vs a Public Company?
• What is the role and purpose of the corporation?
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• Shareholder-Centric Perspective
• Shareholder Value
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• What is the role & rights of Shareholders in the corporation?
  
• Shareholder Democracy Definition
• Quorum Definition
• Information Circular
• Straight and Cumulative Voting
• Statutory (Straight)
  
• Cumulative Voting
• Plurality Voting
• Class Voting Shareholders
• Changing the Voting Rules
• Supermajority (Voting)
• Shareholder Sponsored Proposal 
• What are the variations on attributes of Ownership structure?
• Stock Split
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• Appraisal Rights
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• Say on Pay Rights
• How can shareholder enforce their rights (direct and derivative actions)?
• Amotion
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• Proxy Statement
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• Activist Investor
• Overview of Board of Directors
• Board Decision Making
• Advisory Board (Observer Directors)
• What is the role of the Board of Directors?
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• What is the composition of the board of directors?
• Chairman of the Board
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• Inside Director
  
• Outside Director
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• Independent Outside Director
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• Board Evaluation Definition
• What is the Business Judgment Rule?
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• Codetermination (Foreign)
• What is the role of Managers of the corporation?
• What standards govern manager actions?
• Chief Executive Officer (CEO)
• Chief Financial Officer
• Chief Information Officer (CIO)
• Chief Investment Officer (CIO)
• Chief Legal Officer
• Chief Operating Officer
• Chief Risk Officer
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• What are the primary state and federal corporate governance laws?
• What is the role of the state in corporate governance?
• What is the role of Securities Laws in corporate governance?
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• Holding Company
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• Flip In Poison Pill Definition
  
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