Authorized Number of Shares of Stock

The authorized number of shares of stock, often shortened to authorized shares or authorized capital stock, is the maximum number of shares of each class that a corporation is legally permitted to issue. The limit is set in the company's charter, known in most US states as the articles of incorporation or certificate of incorporation, and can be raised only by amending that document, which normally requires approval by the board of directors and a vote of shareholders.

Authorized shares are a legal ceiling, not an accounting balance. No journal entry is made when shares are authorized, and the number has no direct effect on assets, liabilities or equity. It is disclosed on the face of the balance sheet or in the notes, alongside the numbers of shares issued and outstanding for common stock and preferred stock.

Think of the authorized number as the number of seats a theater is licensed to sell. The theater does not have to sell every seat, and it collects money only for seats it actually sells. But it cannot sell more seats than its licence allows without first getting the licence changed.

Likewise, a company can issue shares up to its authorized limit whenever its board decides, without asking shareholders again. Once the limit is reached, it needs shareholder approval to authorize more.

Three share counts appear in a corporation's equity disclosures, and they are always in descending or equal order:

• Authorized shares. The maximum the charter allows.
• Issued shares. Shares the company has actually sold or otherwise distributed at any time, including shares it later bought back and holds as treasury stock.
• Outstanding shares. Issued shares still held by investors, equal to issued shares minus treasury shares. These are the outstanding shares that vote, receive dividends and are used in earnings per share.

For example, a company may have 50,000,000 common shares authorized, 18,000,000 issued and 17,200,000 outstanding, with 800,000 held in treasury. Its balance sheet line might read: "Common stock, $0.01 par value; 50,000,000 shares authorized; 18,000,000 shares issued; 17,200,000 shares outstanding."

Corporations usually authorize far more shares than they need immediately. A cushion of unissued authorized shares lets the board act quickly to raise capital, pay a stock dividend, carry out a stock split, fund employee stock options or use shares to pay for an acquisition, without calling a shareholder meeting each time. Listed companies may still need shareholder approval for large issues under stock exchange rules, but the charter limit itself is not a barrier.

There are reasons not to authorize an unlimited amount. Investors may worry that a large pool of unissued shares allows heavy dilution, and some states levy franchise taxes or filing fees that depend partly on the number of authorized shares. A board may also use authorized but unissued shares as an anti-takeover defense, which shareholders sometimes resist.

Only issued shares generate entries. When stock is sold, Cash is debited, the stock account is credited for the par value of the shares issued, and any excess is credited to additional paid-in capital. The authorized number appears in the stockholders' equity section as information only.

Analysts nevertheless watch the gap between authorized and outstanding shares. A company with few unissued shares left may need a charter amendment before a planned financing. A recent large increase in authorized shares can signal an upcoming split, a stock-funded acquisition or a capital raise that will dilute existing holders and reduce earnings per share. For a full picture, analysts also count potential shares from options, warrants and convertible preferred stock, which must fit within the authorized total when exercised or converted.

Authorized share counts can also change through a reverse split or a recapitalization approved by shareholders, and companies in financial difficulty sometimes need to increase authorized shares sharply to complete a debt-for-equity exchange. Each change requires a charter amendment filed with the state of incorporation, and public companies describe the proposal in their proxy statements so that shareholders can weigh the potential dilution before they vote. A shareholder reading the equity section should therefore look at all three counts together, not just the number outstanding.