What Is an Authorized Number of Shares?
When you buy stock in a company, you become part owner of that corporation. However, there is a limited amount of stock a corporation can have at any time, known as the authorzed number of shares. Corporation law differs between states, so talk to an attorney in your state for legal advice about corporation shares and other related issues.
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Shares
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A corporation is owned by its stockholders, those who own a share of the corporation. Corporations can only issue a limited number of shares at any given time, known as the authorized number. This number differs widely but is established by the corporation's articles of incorporation. This number can also later be modified by a shareholder agreement.
Articles of Incorporation
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Articles of incorporation are the founding documents for any corporation. When you form a corporation, you must file articles of incorporation in the state in which you begin the corporation. These articles include specific information about the company, such as its name, the purpose for which it is formed, how a board of directors is elected and the number of shares the corporation is authorized to issue.
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Classes
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A corporation can issue different types of stock, each of which it must identify in the articles of incorporation and identify the authorized number of shares. For example, if a corporation intends to issue both common and preferred stock, it must identify the authorized number of both. It can issue 10 million shares of common stock and 1 million shares of preferred stock. The corporation can then modify the total number of authorized shares by having the shareholders approve the change.
Other Considerations
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While a corporation's articles of incorporation establish a finite number of authorized shares, that doesn't mean the corporation will sell all those shares. For example, Yochiro Taku, an attorney with Wilson Sonsini Goodrich & Rosati of Palo Alto, California, states that he typically advises new companies to authorize about 10 million shares of common stock, sometimes as much as 15 million. With 10 million shares, the founders of the company typically receive about 8 million, with the remaining 2 million going into a share option pool. How many of those shares get sold or transferred to other shareholders varies widely from company to company.
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