Authorized stock – definition and meaning
Authorized stock is the amount of authorized capital that a company can legally issue to shareholders. ‘Capital’ means the same as ‘shares’ or ‘stock’. Therefore, the term means how many shares a company can legally sell.
A company’s Articles of Incorporation state what this total is. Articles of Incorporation are the primary rules governing a corporation’s management.
The term means the same as authorized capital, capital stock, authorized shares, and authorized share capital.
In the UK, Ireland, India, and some other countries, people say ‘Memorandum of Association’ rather than Articles of Incorporation.
Companies typically do not issue all their authorized stock. This strategy gives businesses the flexibility to issue additional shares later on when they need more capital.
Companies like holding back additional shares in case they need capital in future.
Authorized stock – example
Let’s imagine you are the CEO of John Doe Limited. John Doe’s factory is working to capacity. In other words, the factory cannot increase production.
However, to meet growing demand, you must increase production. So, you and your fellow Board members have a meeting.
John Doe can either expand the factory or build a new one. You decide that building a new one is the best option. However, a new factory would cost $1 million.
John Doe has 1000 shares as authorized capital but only issued 800 of them. In other words, it has no issued 200 of them They are worth $500 each. If you issue those 200 shares, you will have the $1 million for the new factory.
So, you and the directors vote and decide unanimously to sell the remaining 200 shares. John Doe subsequently has the $1 million it urgently needs, and ultimately its new factory.
To change the authorized stock total, the directors’ need to get shareholders’ approval. The part of the authorized capital that a company has issued to shareholders we call its share capital.
The 2006 Companies Act in the UK did away with the concept of authorized share capital.
People often mistakenly think that authorized stock means the same as outstanding shares. Outstanding shares are the number of shares a company has issued to shareholders, i.e. its share capital.
Authorized stock guidelines
The issuer of the authorized stock must adhere to the company’s guidelines. Specifically, the guidelines that the founders wrote when incorporating the company.
When incorporating a company, it is best to include the sale of additional shares for later on.
According to London South East, authorized share capital is:
“The maximum amount of share capital that a company can issue.”
Video – Authorized stock vs. issued stock
In this video, Dan Ryan of Trinity Law Group talks about the difference between authorized and issued stock. He takes you through the basics of a stock issuance by the shareholders in the charter and discusses other concepts of stock ownership.