When you form a corporation, there are a lot of important steps to take. One key aspect that companies must decide early on is how many authorized and issued shares they will have. These terms might sound confusing at first, but understanding the differences between authorized and issued shares is essential to running a successful business. In this blog post, we’ll break down what authorized and issued shares are, and why they are important for your company.
What are Authorized Shares?
Authorized shares represent the total number of shares that a company is allowed to issue. When a company is formed, it typically files articles of incorporation with the state in which it is incorporated. These articles of incorporation specify the total number of authorized shares that the company is allowed to issue.
It’s important to note that authorized shares do not represent the number of shares that have actually been sold or issued to shareholders. Instead, they are simply the total number of shares that the company has permission to issue. For example, if a company has 10 million authorized shares, but has only issued 5 million to shareholders, it still has 5 million authorized shares that it could potentially issue in the future.
What are Issued Shares?
Issued shares, on the other hand, represent the number of shares that a company has actually sold or issued to shareholders. Once a company issues shares and receives payment for them, those shares become issued shares. These shares can be held by public or private shareholders, and can be traded on the stock market.
It’s important to monitor the number of issued shares a company has, as it can have an impact on things like shareholder voting rights and ownership percentage. If a company issues too many shares, it can dilute the value of existing shareholders’ holdings and decrease their voting power. Conversely, if a company issues too few shares, it can limit its ability to raise additional funds in the future.
Why are Authorized and Issued Shares Important?
Understanding the differences between authorized and issued shares is important for a number of reasons. First, these numbers play a key role in determining the ownership structure and control of a company. If one shareholder owns a significant portion of the issued shares, they may have more control over important decisions than other shareholders.
Additionally, authorized and issued shares can impact a company’s ability to fundraise. If a company has already issued all of its authorized shares, it will not be able to sell any additional shares to raise funds. Furthermore, if a company has too many authorized shares, it can send a message to potential investors that the company is not prudent with its equity and may not be a good investment opportunity.
In conclusion, authorized and issued shares play a key role in determining the ownership structure, control, and fundraising potential of a company. Understanding the differences between authorized and issued shares is essential for any business owner or investor looking to make informed decisions. If you’re forming a corporation or investing in a company, be sure to monitor the company’s authorized and issued share count and understand what those numbers mean for the company’s future.