Authorized Shares: What Are They and How Do They Function in Corporations?

May 28, 2023 By bmapk

Authorized Shares: What Are They and How Do They Function in Corporations?

What do you mean by “licensed stock”?

  • In corporate law, the term “authorized shares” refers to the maximum number of stock certificates that a business may legally issue. The shareholders or board of directors of the company decide on this number and include it in the bylaws or articles of organization. Authorized shares are often referred to as authorized capital stock or authorized stock.
  • In order to officially start doing business, a corporation must file the necessary paperwork with the government. This legal document is commonly referred to as the articles of incorporation. The articles of incorporation will detail the company’s stock structure and the total number of shares issued to shareholders and investors.

Authorized but unissued share capital There are a number of reasons why businesses must hold onto a portion of their authorized stock. Here are a few examples:

  1. As a form of incentive, some companies will provide employees with stock options or warrants as part of an employee stock ownership plan (ESOP). However, the company needs to have enough approved stock that hasn’t been issued in order to issue these shares, which then become outstanding shares when employees exercise the option.
  2. Urgent funding is required. When a firm is desperately in need of funds, issuing new shares is often their last resort. In certain cases, though, a company may swiftly issue additional shares. Therefore, it is advantageous for management to have unissued approved shares since they can expand the permitted supply without seeking shareholder approval.
  3. A Share of Authorized Stock as an Example PayFriend is a financial service that streamlines the process of sending money to friends and relatives. PayFriend is authorized by its charter to issue up to 100,000 shares.

Investors have only been granted 60,000 shares thus far. There are a total of 60,000 shares in the corporation, and each of the three founders owns 20,000.

Let’s imagine the company needs to raise capital and is looking to attract new equity investors. Following that, an additional 40,000 shares of ordinary stock may be issued.

According to the equity portion of the balance sheet, if all of the shares approved and all of the shares outstanding were combined, the total would be 100,000.

Authorized shares are a company’s entire number of shares that can be issued. The total number of shares that are currently held by shareholders is known as “outstanding shares.”

Investors can determine if there is a risk of stock dilution by comparing the number of authorized shares with the number of outstanding shares. Dilution occurs when the number of outstanding shares is less than the number of authorized shares. Accurate financial ratios can also be computed with the help of the authorized and outstanding shares.

  • Overall Discussion Approved stock, or authorized shares, refers to the maximum number of shares that a corporation is permitted to issue in accordance with its bylaws. Authorized share capital is the sum of all claims multiplied by their respective par values.

In-use shares are different from authorized shares. Authorized shares are the company’s shares that have been issued to stockholders. It is common practice for some of the allocated shares to go unused.

Only a vote of the shareholders can increase or decrease the company’s authorized share capital. In most cases, consent from stockholders is required under corporate charters before the number of authorized stock shares can be increased.


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