Authorized Stock: What is it?
Authorized Shares refer to the total number of shares a company has the legal right to issue. This number is determined by the Company’s shareholders or board of directors and is stated in the bylaws or incorporation documents. Authorized shares are also known as authorized stock or authorized capital stock.
To incorporate as a company, a company must file its legal documents with the government. This is known as the articles of incorporation. The article of incorporation contains information about the Company’s stock structure and the total number of shares it issues to owners and investors.
Value of unissued authorized shares
For various reasons, businesses must retain a portion of their authorized stock as unissued. The following are:
- Issuing warrants and stock options
Many businesses occasionally offer their employees the chance to participate in their employee stock option plan as compensation (ESOP). However, the corporation needs to have a sufficient amount of the authorized stock unissued in order to issue these shares, which become a part of the outstanding shares upon the exercise of the option by the employees.
- Need immediate fundraising
Typically, when a company needs funds, issuing additional shares is the last option. However, under unusual conditions, a firm might quickly issue more shares. Therefore, it is advantageous to have unissued approved stock because it allows management to issue new shares without first seeking shareholder approval to increase authorized supply.
An illustration of authorized stock
A financial firm called Pay friend makes sending money to friends and family simple. According to Payfriend’s corporate charter, the Company is permitted to issue 100,000 shares.
Only 60,000 shares, nevertheless, have been distributed to stockholders. Each of the three co-founders of the business owns 20,000 shares, for a total of 60,000.
Assume the business wishes to raise money and draw in more equity investors. Following that, 40,000 more shares of ordinary stock could be issued.
According to the equity part of the Company’s balance sheet, the total number of outstanding shares would be 60,000, and the total number of authorized shares would be 100,000.
Authorized shares are the entire number of shares that a firm may issue. The number of shares that shareholders hold is the number of outstanding shares.
Investors can assess the possibility of stock dilution by comparing the number of outstanding shares with the number of authorized shares. The likelihood of dilution increases with the size of the discrepancy between authorized and outstanding shares. Financial ratios can also be precisely calculated using the authorized and outstanding shares.
FINAL OVERVIEW
“Approved stock” or “authorized shares” refers to the most number of shares a corporation is legally permitted to issue following its bylaws. The number of authorized shares plus the face value of each claim are added to determine the authorized share capital.
Authorized shares are different from shares that are currently in use. Divided into issued shares, which are given to the Company’s stockholders, are called authorized shares. Typically, some of the allotted shares are not issued.
Only a vote of the shareholders may amend the Company’s authorized share capital. According to corporate charters, increasing the number of shares of authorized stock is typically subject to shareholder approval.
