The maximum number of shares of stock that a corporation is legally allowed to issue, as specified in its Articles (or Certificate) of Incorporation.
What are Authorized Shares?
When incorporating a company in the U.S., one of the decisions is how many authorized shares the corporation will have. Authorized stock (or authorized shares) is the upper limit of shares that can ever be issued without amending the incorporation documents. For instance, a common default for startups is to authorize 10,000,000 shares of Common Stock. This does not mean all those shares are issued to founders immediately – it just sets a ceiling. The company might initially issue, say, 5,000,000 shares to founders and reserve others for future investors or an option pool. Authorized shares are typically set generously high to allow flexibility for bringing on new shareholders or option grants without needing to change the charter right away.
This number is declared in the Articles of Incorporation (for example, “The corporation is authorized to issue 10,000,000 shares of Common Stock, $0.0001 par value”). If a corporation wants to issue more shares than authorized, it must formally amend its Articles via shareholder approval and a state filing, which is why companies choose a high initial number. Non-U.S. founders should know that authorized shares are not the same as outstanding shares. Outstanding (or issued) shares are the ones actually given out to shareholders and represent ownership. Authorized but unissued shares sit in reserve. The par value is also associated with authorized shares – a nominal value per share (often very low, like $0.0001) which historically represented the minimum issuance price, but nowadays is just a legal formality (having a low par value helps avoid certain tax issues on issuing shares cheaply).
Importantly, some states (like Delaware) calculate franchise taxes partly based on the number of authorized shares (Delaware’s Franchise Tax has two methods, one of which considers authorized shares). Delaware corporations with more than 5,000 authorized shares pay a higher flat franchise tax unless using the alternative “assumed par value” method. Thus, if you authorized 10 million shares in Delaware, you’ll likely use the calculation method that considers assets to keep the tax reasonable. In summary, authorized shares set the capital structure’s framework. Ensure the number is sufficient for future issuance but not wildly excessive to incur unnecessary fees. Clemta or lawyers often guide setting this number appropriately for startups (e.g., many tech startups go with 10M or 5M authorized shares for simplicity and investor familiarity).
