Key Takeaways

  • Authorized shares refer to the maximum number of shares a corporation is legally permitted to issue, as defined in its charter.
  • Issued shares are the subset of authorized shares that have been distributed to shareholders.
  • Companies often authorize more shares than they initially issue to retain flexibility for future fundraising, stock splits, or acquisitions.
  • The number of authorized shares can be increased through shareholder approval.
  • Outstanding shares include all issued shares currently held by shareholders (excluding treasury stock).
  • Treasury stock, options, and warrants affect the difference between authorized, issued, and outstanding shares.
  • Stock dilution and company control are key considerations in managing authorized share volumes.

Authorized shares vs issued shares refer to stock that is authorized versus the maximum number of shares that are legally permitted to be issued by a corporation. The shares issued on the open market to the public for trading comprise all or a portion of the authorized shares of the corporation.

About Authorized Shares

For clarity, when discussing authorized stock, it is also referred to as authorized capital stock or authorized shares. When investors or company owners are researching the ownership of a company's shares, they may encounter terms such as:

  • Authorized shares.
  • Issued shares.
  • Allocated shares.
  • Unissued shares.

There are also restricted shares. These are a type of authorized shares and are reserved for employee incentives and compensation. You may also come across the word "float" when discussions are about the number of actual shares available to trade.

When looking at a company's balance sheet in regard to outstanding shares, the figure is the sum of the restricted shares and float shares. In the event the outstanding shares are less than what was authorized, the difference is considered unissued stock and is retained in the company's treasury.

Authorized vs Outstanding Shares

While authorized shares represent the total number of shares a corporation can legally issue, outstanding shares are those that have actually been issued and are currently held by shareholders, excluding any shares that have been repurchased and held in treasury. The distinction is important because only outstanding shares are used when calculating key financial metrics like earnings per share (EPS) or market capitalization.

For example, if a company has authorized 10 million shares but has only issued 6 million, and 500,000 have been repurchased, then the number of outstanding shares would be 5.5 million.

Authorized Shares and Certificates of Incorporation

A decision made when a company is being incorporated is determining what number the authorized shares are set to. This number is listed in the certificate of incorporation also known as the articles of incorporation. There is often a misconception that the number of authorized shares listed in the certificate or articles is equal to the total number of shares. Outstanding and issued shares are different from authorized shares.

Authorized Shares

As mentioned, authorized shares refer to the number of shares listed in the company's articles of incorporation that are allowed to be issued. The common range when determining this figure is between 10 and 15 million.

Issued Shares

With issued and outstanding shares, the number cannot exceed the authorized shares. Typically, between 5 and 10 million shares are issued.

How Issued Shares Are Tracked

Issued shares are recorded on the company's balance sheet and represent actual ownership in the company. These shares may be:

  • Held by institutional and retail investors
  • Allocated to founders or employees through stock option plans
  • Purchased on the public market

It's important for companies to track issued shares separately from authorized shares because it directly impacts voting rights, dividend distributions, and ownership percentages. Shareholder equity in financial statements reflects the value of these issued shares.

Reasons for Limiting Authorized Shares

The reason a company typically has more authorized shares than issued shares is to give the enterprise the option of offering and selling more shares to generate additional funds, if or when needed, in the future. For example, a company with 1 million authorized shares initially sells 500,000 of those shares in a public offering (IPO). A total of 50,000 shares are reserved for stock options for retention of employees or to attract new employees, and a secondary public offering makes 150,000 shares available to raise money.

The unissued stock is retained in the treasury account of the company will look like this: 1 million minus 500,000 minus 150,000 equals 300,000. There are two additional reasons why a company may choose to not issue all of its authorized shares. First, retaining a set number of authorized shares allows the company to maintain a controlling interest. Second, being in control prevents the possibility of a hostile takeover.

Impact on Control and Takeovers

Keeping a reserve of authorized but unissued shares provides a company with strategic leverage. For example:

  • Defensive Mechanism: Management can issue shares to dilute the holdings of a hostile bidder, making a takeover more difficult.
  • Investor Confidence: A limited number of issued shares can help maintain higher earnings per share, appealing to investors.
  • Board Control: Retaining unissued shares ensures that founders or executives can maintain decision-making authority if needed.

This strategy is especially relevant for startups or family-owned businesses aiming to protect their vision from external influence.

Increasing the Number of Authorized Shares

The number of authorized shares can be increased with a vote by the shareholders when the majority are in favor of the change. There is no timeframe limiting when a change can be made. A shareholders meeting and vote can take place at any time. A company may choose to keep its authorized shares substantially higher than its outstanding shares, which allows the company flexibility in selling shares at any time.

Increasing the number of outstanding shares can be achieved in several ways:

  • Issuing shares by private placement.
  • An initial public offering.
  • A secondary offering.
  • A stock payment.
  • Someone exercising an option or warrant.

The number of outstanding shares can also decline due to a company buying back shares. When this occurs, this is referred to as treasury stock. An example would be the charter for a major company that states the total authorized stock will include 5 billion shares of common stock and preferred stock will be at 500 million shares.

The company's charter permits the increase of authorized stock when the conversion of preferred stock is not possible due to not enough unissued common stock.

Legal and Procedural Considerations

Increasing the number of authorized shares typically requires:

  • A vote by the board of directors to propose an amendment to the articles of incorporation
  • Shareholder approval by majority vote
  • Filing an amended certificate of incorporation with the state

This process ensures transparency and shareholder participation, and the updated share authorization is reflected in official corporate filings. Companies may also need to notify exchanges or investors depending on the nature of the change.

Stock Dilution

A situation occurs when the difference between the number of authorized shares and outstanding shares increases.

Frequently Asked Questions

1. What are authorized shares? Authorized shares are the maximum number of shares a corporation is legally allowed to issue, as stated in its articles of incorporation.

2. How are issued shares different from authorized shares? Issued shares are the portion of authorized shares that have been distributed to shareholders. The remainder are unissued.

3. Can a company increase its authorized shares? Yes, by holding a shareholder vote and filing an amendment to the articles of incorporation.

4. What are outstanding shares? Outstanding shares are issued shares currently held by shareholders, excluding treasury stock.

5. Why might a company not issue all authorized shares? To maintain control, avoid dilution, and keep flexibility for future financing, acquisitions, or stock-based compensation plans.

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