Definition of Shares Authorized
Shares authorized, often referred to as authorized stock or authorized shares, represent the maximum number of shares a corporation is legally permitted to issue as prescribed in its Articles of Incorporation. This total includes all types of shares (common and preferred) the company can provide to shareholders, and it typically exceeds the shares that have actually been issued and are outstanding.
Examples
Company A is authorized to issue 10 million shares of its common stock as per its Articles of Incorporation. Of this, it has issued 5 million shares to investors, hence 5 million shares remain available for future issuance.
Company B is authorized to issue 500,000 shares of preferred stock and 1 million shares of common stock. As of the current date, only 300,000 shares of common stock have been issued and are in circulation.
Frequently Asked Questions (FAQs)
What is the purpose of authorizing more shares than are issued?
To provide flexibility for future financial strategies, such as raising additional capital, accommodating potential stock splits, or issuing stock options to employees.
Can a company issue more shares than authorized?
No, a company cannot issue shares beyond the amount authorized in its Articles of Incorporation. Issuing additional shares would require an amendment to the Articles, typically necessitating shareholder approval.
How can authorized shares be increased?
To increase authorized shares, the corporation must amend its Articles of Incorporation through a resolution agreed upon by the board of directors and approved by shareholders.
Where are authorized shares reported?
Authorized shares are typically detailed in the capital accounts section of a company’s balance sheet and in the footnotes of its financial statements.
What’s the difference between authorized, issued, and outstanding shares?
- Authorized shares: Total shares a company can issue, as stated in its Articles of Incorporation.
- Issued shares: Total shares that have been distributed to shareholders and may include treasury shares.
- Outstanding shares: Issued shares currently held by shareholders, excluding treasury shares.
Related Terms
Articles of Incorporation
A document that establishes a corporation’s existence in the eyes of the law and typically includes details on the corporation’s purpose, the total number of authorized shares, and other structural information.
Shares Issued
This refers to the subset of authorized shares that have actually been distributed by the company to shareholders.
Shares Outstanding
The number of shares that are currently held by shareholders, excluding any treasury shares repurchased by the company.
Online References
- Investopedia - Authorized Stock
- Wikipedia - Authorized Shares
- The Balance - What Are Authorized Shares?
Suggested Books for Further Studies
- “Fundamentals of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Alan J. Marcus
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- “Corporate Finance: The Core” by Jonathan Berk and Peter DeMarzo
Fundamentals of Shares Authorized: Business Law Basics Quiz
Thank you for exploring the detailed aspects of shares authorized. May this knowledge enhance your understanding of corporate finance and legal structure!