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
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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.
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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.
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
### What are authorized shares?
- [ ] Shares that have been sold to investors.
- [ ] Shares currently held by shareholders.
- [x] Shares a company is permitted to issue as per its Articles of Incorporation.
- [ ] Shares that are allocated but not yet issued.
> **Explanation:** Authorized shares represent the maximum number of shares a company can legally issue, as detailed in its Articles of Incorporation.
### Where are authorized shares typically listed?
- [ ] On the company’s website.
- [ ] In the shareholders’ annual meeting report.
- [x] In the capital accounts section of the company's balance sheet.
- [ ] On stock certificates.
> **Explanation:** Authorized shares are generally listed in the capital accounts section of a company's balance sheet.
### Why might a company want more authorized shares than issued shares?
- [ ] To reduce operational costs.
- [x] To provide flexibility for future financial maneuvers.
- [ ] To prevent takeovers.
- [ ] To increase voter rights.
> **Explanation:** Having more authorized shares than issued shares gives a company flexibility for future financial actions like raising capital or stock splits.
### Can a company issue more shares than are authorized in its Articles of Incorporation?
- [ ] Yes, with board approval.
- [ ] Yes, if shareholders agree.
- [x] No, not without amending the Articles of Incorporation.
- [ ] Yes, by issuing preferred stock instead.
> **Explanation:** A company cannot issue more shares than authorized without amending its Articles of Incorporation through proper channels.
### How can a company increase the number of authorized shares?
- [ ] By board decision only.
- [x] By amending the Articles of Incorporation with shareholder approval.
- [ ] Through a special meeting of shareholders without board consent.
- [ ] By merging with another company.
> **Explanation:** Increasing the number of authorized shares requires amending the Articles of Incorporation, which shareholders must approve.
### What are issued shares?
- [ ] All shares the company can issue by law.
- [x] Shares distributed to investors, which may include treasury shares.
- [ ] Shares that are currently held solely by company insiders.
- [ ] Shares waiting to be sold in the future.
> **Explanation:** Issued shares are those that the company has distributed or sold to investors and may include treasury shares.
### What is the distinction between issued and outstanding shares?
- [ ] There is no difference.
- [ ] Issued shares are held by the public; outstanding shares are held by insiders.
- [x] Outstanding shares exclude treasury shares while issued shares include them.
- [ ] Issued shares are part of the authorized count; outstanding shares are not.
> **Explanation:** Outstanding shares are those currently held by shareholders, excluding treasury shares, whereas issued shares include all shares distributed by the company, including treasury shares.
### What document details the number of authorized shares?
- [ ] Employment contracts.
- [ ] Shareholder agreements.
- [x] Articles of Incorporation.
- [ ] Company bylaws.
> **Explanation:** The number of authorized shares is specified in the Articles of Incorporation of the company.
### In which section of the balance sheet are authorized shares found?
- [ ] Liabilities.
- [ ] Revenue.
- [x] Capital accounts.
- [ ] Cash flow statement.
> **Explanation:** Authorized shares are typically listed in the capital accounts section of a company's balance sheet.
### What happens to the unauthorized shares?
- [ ] They are lost forever.
- [ ] They count against issued shares.
- [x] They remain available for future issuance.
- [ ] They must be issued within a year.
> **Explanation:** Unauthorized shares remain available for future issuance by the company as needed.
Thank you for exploring the detailed aspects of shares authorized. May this knowledge enhance your understanding of corporate finance and legal structure!
