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Concept of “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 authorizes 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.
How Many Shares to 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.