Authorized Capital Stock
Authorized capital stock is the maximum number of shares that a corporation is legally allowed to issue, as specified in its articles of incorporation. This number is determined when the corporation is first established and can be changed later with the approval of the shareholders, usually through a majority or supermajority vote.
The authorized capital stock represents the potential capital that a company can raise by issuing shares to investors. It is important to note that not all authorized shares are necessarily issued and outstanding; some may be held in reserve for future use, such as raising additional capital, stock options, or stock-based employee compensation plans.
The difference between authorized shares and issued shares is significant. Authorized shares are the maximum number of shares that can be issued, while issued shares are the actual number of shares that have been sold to investors and are currently outstanding. The number of issued shares is always less than or equal to the authorized shares.
Example of Authorized Capital Stock
Let’s consider a hypothetical company called XYZ Corporation.
When XYZ Corporation is established, the founders decide to authorize 10 million shares of common stock in their articles of incorporation. This means that the company has the legal right to issue up to 10 million shares of common stock.
At the time of its initial public offering (IPO), XYZ Corporation decides to issue 4 million shares to raise capital from investors. After the IPO, the company has 4 million issued shares, which are owned by its shareholders. This leaves XYZ Corporation with 6 million authorized but unissued shares, which the company can use in the future for various purposes, such as raising additional capital, funding employee stock option plans, or executing stock splits.
In this example, the authorized capital stock of XYZ Corporation is 10 million shares, but only 4 million shares have been issued and are outstanding.