Authorized Shares Explained: Structure, Use & Strategy

Key Takeaways

• Authorized shares represent the maximum number of shares a corporation can legally issue, as defined in its Articles of Incorporation.
• Issuing all authorized shares upfront can limit a company’s flexibility for future fundraising or equity compensation.
• Increasing the number of authorized shares requires formal amendments and shareholder approval.
• Not all authorized shares are issued immediately; some are reserved for strategic purposes like mergers, acquisitions, or stock options.
• There are tax, governance, and dilution considerations when setting or adjusting authorized share counts.
• Differences between authorized, issued, and outstanding shares can impact valuation, control, and reporting.

What are Authorized Shares?

Authorized shares are the number of stock shares a company may issue to investors or employees at the time they incorporate and stock shares that the company board of directors may issue later as specified in the Articles of Incorporation.

How Authorized Shares Differ From Issued and Outstanding Shares

Authorized shares are often confused with issued and outstanding shares, but each term has a distinct meaning:

• Authorized Shares: The maximum number of shares a corporation is allowed to issue, as stated in its Articles of Incorporation.
• Issued Shares: The portion of authorized shares that have been distributed to shareholders.
• Outstanding Shares: Issued shares currently held by shareholders, excluding any treasury shares repurchased by the company.

Understanding this distinction is important because only issued and outstanding shares affect ownership percentages, voting rights, and dividend distribution. Meanwhile, authorized shares set the ceiling for what the company may issue in the future.

Why Is Getting the Number of Authorized Shares Right Important?

Authorized shares can be issued when a company asks for financing. They may also be issued as a benefit for key employees. Usually, the number of shares that are authorized is much more than what is actually needed. This is to allow the company to issue stocks in the future when needed (as employee perks or perhaps as a secondary offering to raise more money). A company may refrain from issuing all of its authorized shares to maintain a controlling interest in the company and therefore prevent a hostile takeover.

The number of authorized shares can be changed by shareholder vote.

Flexibility in Strategic Business Decisions

Having unused authorized shares provides corporations with strategic flexibility. Companies often reserve unissued authorized shares for:

• Future capital raises without the need to amend the Articles of Incorporation.
• Stock-based employee compensation such as stock options or restricted stock units.
• Mergers and acquisitions, where shares may be exchanged as part of the deal structure.
• Convertible securities, like convertible notes or preferred shares, that may later convert into common shares.

Maintaining a reserve of authorized shares can be critical to avoid delays or legal hurdles when quick action is needed.

What Should I Consider When Determining Authorized Shares?

There are numerous things to consider when determining how many shares of stock to authorize. Some of them include:

• Number of Business Principals – how many people are involved in the business and what number of shares might you consider giving them?
• Future Funding Needs – authorized shares may be converted to issued shares by a board of director's votes. Therefore, you should make sure you consider how many shares you will want to issue to lending partners in the future.
• Future Key Employee Perks – offering shares to a potential employee is a good way to attract the talent your business will need. This is one of the considerations when determining what number of shares to authorize.

State Filing Fees and Costs

Some states charge incorporation or franchise taxes based on the number of authorized shares or the total par value of those shares. When selecting the number of authorized shares, consider:

• State-specific tax structures: For example, Delaware calculates its franchise tax based in part on authorized shares.
• Cost minimization: Companies can lower initial costs by authorizing fewer shares and amending later if needed.
• Administrative complexity: More shares can mean more record-keeping and disclosure obligations.

Working with a legal or tax advisor can help ensure your share structure aligns with both business and regulatory needs.

What Are the Dangers of Too Few Authorized Shares?

There is very little downside to not providing sufficient authorized shares; however, if you do have to increase the number of shares later, you will have to redraft and modify your articles of incorporation.  Remember, there is no limit to the number of shares you may authorize at the time of incorporation.

Consequences of Over-Issuing Shares

Issuing more shares than are authorized is a serious compliance violation. Consequences may include:

• Invalidated stock issuances, which can affect investor rights and lead to costly legal disputes.
• Regulatory penalties in states that monitor corporate governance closely.
• Need for corrective action, such as shareholder approval and amendments to retroactively authorize excess shares.

To prevent unintentional over-issuance, it is vital to maintain accurate records and implement controls over equity issuance.

Comparison Chart

Real-World Example of Authorized Shares

Consider a corporation that authorizes 10 million shares in its Articles of Incorporation. Of those:

• It issues 4 million shares to early investors.
• 3.5 million of those remain outstanding (the rest are repurchased as treasury stock).
• 6 million authorized shares remain unissued, reserved for future fundraising, employee equity plans, or acquisitions.

This setup ensures the company retains flexibility while complying with state and federal securities regulations.

When and How to Amend Authorized Shares

If a corporation needs to increase or decrease its authorized shares, it must:

1. Obtain board approval for the proposed change.
2. Secure shareholder approval, typically by majority vote.
3. File an amendment to the Articles of Incorporation with the Secretary of State.
4. Update internal records and cap tables to reflect the new authorized share count.

This process varies by jurisdiction but generally includes filing a certificate of amendment and paying a state fee. For accurate filing and compliance, consider consulting a business attorney—one of whom you can easily find through UpCounsel.

Frequently Asked Questions

1. What is the purpose of authorized shares?
   Authorized shares define the maximum number of shares a company can legally issue. They provide flexibility for fundraising, employee compensation, and strategic growth.
2. Can a company change the number of authorized shares?
   Yes, but it requires board and shareholder approval, followed by an official amendment to the Articles of Incorporation.
3. Do authorized shares affect company valuation?
   Not directly. Valuation depends more on issued and outstanding shares. However, having too many authorized shares might raise investor concerns about dilution.
4. Are authorized shares always issued?
   No. Companies often keep a portion of their authorized shares unissued for future use or to retain control.
5. What happens if a company issues more than its authorized shares?
   This can result in legal invalidity of the excess shares, necessitating corrective action such as shareholder ratification and amendment of the charter.

If you need help with understanding authorized shares, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.