Authorized Shares

Authorized shares are the maximum number of shares a corporation is legally permitted to issue, as established in its articles of incorporation. This number sets a ceiling on the number of shares that can ever be distributed to founders, investors, or employees. A corporation is not required to issue all authorized shares at once, and the count can be changed later through a formal amendment process.

How authorized shares work

When founders form a corporation, they specify the total authorized shares in the articles of incorporation filed with the state. From that pool, the board of directors can issue shares to shareholders as needed.

Four categories define the relationship between authorized and issued shares.

• Authorized shares: the total permitted by the articles of incorporation
• Issued shares: shares actually distributed to shareholders
• Outstanding shares: issued shares currently held by shareholders, excluding treasury shares
• Unissued shares: authorized shares that have never been distributed

A corporation with 10,000,000 authorized shares might issue only 2,000,000 at formation and hold the rest in reserve.

Key characteristics

Authorization is not issuance. Authorizing shares grants legal permission, but issuing shares is the act of distributing them. Only issued and outstanding shares carry voting rights, dividend eligibility, and ownership interest.

Authorization alone does not dilute shareholders. Dilution occurs only when new shares are issued to new shareholders, reducing existing holders' percentage ownership.

Changing the count requires a formal process. Increasing authorized shares requires amending the articles of incorporation, typically with board approval and a shareholder vote.

Share classes can be authorized separately. The articles of incorporation can authorize different classes (for example, 8,000,000 shares of common stock and 2,000,000 shares of preferred stock), each with distinct rights.

Why authorized shares matter

The authorized share count determines a corporation's flexibility to raise capital, grant equity, and distribute ownership without having to return to shareholders for approval each time.

Setting the number too low creates friction. If a corporation exhausts its authorized shares, it must amend its articles of incorporation (a process involving legal filings, fees, and typically a shareholder vote), which can delay funding rounds or equity compensation plans.

Setting the number too high has cost implications. Delaware, for example, calculates incorporation fees partly based on authorized shares, so founders should balance future flexibility against upfront costs. Most startup attorneys recommend authorizing 10 to 15 million shares at formation, issuing a portion to founders, and reserving the rest.

Common uses

• Founder equity: shares issued at formation to split ownership among co-founders
• Investor fundraising: unissued shares reserved for and distributed in a funding round
• Employee stock options: a portion of authorized shares set aside for an equity compensation pool—early-stage startups typically reserve 10–20% of fully diluted shares for this purpose
• Acquisitions: unissued shares used as consideration in a stock-for-stock deal

Related terms

• Ownership interest: the stake a shareholder holds, determined by shares issued relative to total outstanding
• Ownership percentage: how authorized and issued share counts translate into proportional ownership
• Direct ownership in business: how shares represent a direct equity stake in a corporation
• Indirect ownership in business: ownership held through another entity rather than directly through shares
• Buy-sell provision: contractual terms governing how shares can be transferred among shareholders

FAQs about authorized shares

Where does the authorized share count appear?

The authorized share count should be in the articles of incorporation filed with the state at formation. For public companies, it also appears in the stockholders' equity section of the balance sheet.

Can a corporation issue shares beyond its authorized limit if shareholders agree?

No. The corporation must first formally amend its articles of incorporation through the state filing process before additional shares can legally be issued.

How are authorized shares different from outstanding shares?

Authorized shares are the legal ceiling on total issuance. Outstanding shares are the subset of issued shares currently held by shareholders, excluding any shares the company has repurchased as treasury stock.