A corporation sets an upper limit on the number of shares that it can issue, known as the authorized stock amount. This limit is determined by the corporation’s certificate of incorporation , which are the legal documents that define the corporation’s purpose and outline its rules and regulations. The number of authorized shares can be increased by the shareholders of the company at annual shareholder meetings, provided a majority of the current shareholders vote for the change. The number of outstanding shares is always equal to or less than the number of authorized shares. The number of authorized shares may be kept substantially higher than the number of outstanding shares, so that an organization has the flexibility to sell more shares at any time, depending on its financing needs.

Outstanding shares decrease when a company repurchases its own stock. The total number of outstanding shares cannot be greater than the total number of authorized shares as laid out in a company’s articles of incorporation. Determining the appropriate number of authorized shares depends on several factors.

Shares Issued

Shareholders have the right to vote on any proposed change to the authorized stock of a company, reports Accounting Coach. That’s because changing the stock structure will have a direct impact on the shareholder’s ownership stake in the company . Payfriend is a fintech startup that makes it easy to send money to friends and family members. Payfriend’s corporate charter states that the company is authorized to issue 100,000 shares.

• Authorized stockis the amount of authorized capital that a company can legally issue to shareholders.
• One of the best ways to understand how authorized and outstanding shares work is through real-world examples.
• Authorized shares are the maximum number of shares that a company can issue.
• The common range when determining this figure is between 10 and 15 million.

Authorized shares, or authorized stock, are simply a legally allowed maximum number of shares that a company can issue to investors. The number of authorized shares is specified in the company’s articles of incorporation. You can also see the number in the capital accounts section on the balance sheet.

authorized stock

For retaining and attracting employees, the company may reserve 50,000 of the authorized stock as stock options. It may also sell 150,000 shares in a secondary offering to raise funds in the future. Authorized stock is a term that refers to the total number of shares of stock that a corporation is authorized or allowed to issue to shareholders. Issued stock, on the other hand, is the number of shares that have actually been issued or granted to shareholders.

• Authorized stocks can be increased, but it requires consent from the company shareholders.
• Public companies must often notify existing shareholders and call for a shareholder vote.
• The table below highlights the differences between authorized shares and issued shares.
• The number of Authorized Shares must account for all of the corporation’s Issued Shares and Reserved Shares.

Authorized shares are the total number of shares that companies can legally issue to their investors while outstanding shares are any shares that are held by all shareholders. The number of shares that can be issued is limited to the total authorized shares. Issued shares are those shares which the board of directors and/or shareholders have agreed to issue, and which have been issued. The shares issued by a company generate the value or assets given for founding a company or growing it later on. Companies may retain authorized shares for the purpose of conducting a secondary offering later, sometimes called a tender offering. The authorized shares are established by the company’s articles of incorporation.

Authorized Shares Explained

Similarly, if a corporation issues warrants, the corporation must reserve enough shares for the warrants to convert into the applicable shares of stock. A corporation must also reserve that number of shares of Common Stock underlying the corporation’s stock option plan. When a company is formed, it decides on the maximum number of shares it would like to offer. The shares that are issued to the public to trade on the open markets comprise all or a portion of a company’s authorized stock. In addition, restricted shares, which are reserved for employee compensation and incentives, are also part of authorized shares. The total number of a company’s outstanding shares as seen in the balance sheet is the sum of float and restricted shares.

The remaining authorized but unissued shares are available in the event a corporation needs to issue more shares. Outstanding shares are the shares issued or sold to investors from the available number of authorized shares. Several activities can increase the number of outstanding shares, including exercising a warrant or option, an initial public offering, a secondary offering, employee stock options, or a private placement. A secondary stock market offering can increase the number of outstanding shares, as can the payment of employee stock options .

Treasury Stock

In the case of debt, interest should be paid on time otherwise the company become bankrupt. Issuance of share is more flexible as a number of shares to be issued, class of shares, the face value of the share and when it to be issued is decided by the company on its own. The company can raise additional share capital by issuing more shares. Restricted shares serve as a great motivational shares authorized vs issued tool for employees because, after receiving the shares, they automatically become owners of the company and, thus, receive voting rights. They will then feel more responsible for the company and its overall performance. It produces more motivation for them to work hard and achieve further corporate goals because it will proportionally make an impact on their worth as shareholders.

The amount of issued stock is dependent on the authorized capital of a company, or the maximum number of shares authorized by a company’s corporate documents to issue to shareholders. The amount of issued stock is based on a company’s authorized shares, or the maximum number of shares authorized for issue to shareholders. Once the corporation raises money by issuing preferred stock, a certain number of authorized shares must be reserved for the conversion of the preferred stock into common stock. Understanding the different classifications of stock is essential for a corporation to effectively and efficiently utilize one of its most valuable resources – its capital stock. Authorized shares are the maximum number of shares that a company is allowed to issue, as specified in its articles of incorporation. A company will usually have a large number of authorized shares, but not all of them will be issued.

Increasing the Number of Authorized Shares

Consider the example of company ABC which has stated a limit of 30,000 authorized shares in its charter of incorporation. A business owner must take into account not only how many shares of stock the company needs at the time it incorporates, but how many it might need in the future as the company grows and adds investors. The incorporation documents spell out how many shares the company is allowed, or authorized, to make available.