What is Authorized Stock?

Authorized stock is the maximum number of shares that a corporation is allowed to issue. The number of authorized shares is stated in the entity’s articles of incorporation or charter. The initial amount of authorized stock is set when the corporation is initially formed.

A business will typically ask its shareholders to authorize an increase in the amount of authorized stock when it is close to issuing all of the shares that it is legally allowed to issue. it is usually not legally sufficient for the board of directors to make this authorization; only a majority of the shareholders can do so.

The managers of a business usually want to maintain a large amount of authorized stock, so that they have room to issue more stock for a variety of reasons, such as to raise funds or to pay for an acquisition. For example, a business might have 10 million authorized shares, of which only five million are actually outstanding. Another 100,000 might be reserved for unexercised stock options, while another 1 million might be reserved for outstanding convertible bonds that might be converted by investors into common stock. The remaining amount of authorized stock would then be available for currently undesignated uses. All authorized but unissued stock is said to be retained in the corporate treasury.

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The current owners of a corporation might not want to increase the amount of authorized stock, on the grounds that doing so could dilute their ownership interest in the business when the additional shares are sold to outside investors. This is a particular concern for a privately-held business, where there tend to be few shareholders.

Presentation of Authorized Stock

The number of authorized shares is usually stated in the equity section of a reporting entity’s balance sheet. It may also be disclosed in the accompanying footnotes.

The Difference Between Authorized Stock and Outstanding Stock

Authorized shares are the maximum number of shares that a corporation is allowed to issue, while outstanding stock is the number of shares that have actually been issued. In nearly all cases, the number of outstanding shares is significantly less than the number of authorized shares.

When there is a large difference between the amount of authorized and outstanding stock, this increases the risk that the ownership positions of current shareholders will become diluted through additional share issuances. This situation can arise when a corporation pays for an acquisition with its stock, or when investors elect to convert its convertible bonds into shares of common stock. It can also occur when employees are paid with stock or stock options.