Definition: Authorized stock is the total number of shares a corporation is allowed by the corporate charter to issue to shareholders. When a company incorporates, it establishes a corporate charter. This is a document that sets the rules, establishes a structure, and creates the classes of stock that will be issued to investors in the future.
What Does Authorized Stock Mean?
Each corporate charter establishes the total number of shares that a corporation can issue. These shares are called authorized shares because this is the amount of stock that the company is legally authorized to issue. Once the corporate charter is complete, the number of authorized shares is set. It can’t be changed unless the charter is rewritten because an expansion, merger, or some other change of entity type.
This situation is common for many growing companies that want to take on new investors. After all of the authorized stocks have been issued, the company needs to get more authorized in order to take on new investors.
The number of authorized stock along with outstanding shares is listed on the financial statements or in the notes. This informs investors how many more shares can be issued by the company.
Let’s look at an example.
Example
Stewart Corp is a guitar manufacturer that produces high-end electric and acoustic guitars. Stewart is a family company and has been in business for 30 years. The corporate charter authorized Stewart to issue 50,000 shares, but there are only 30,000 shares currently issued to shareholders. Stewart owns 15,000. His wife owns 10,000 and his two children both own 2,500 shares. This means that if the company wanted to take on more investors, it could issue another 30,000 shares of common stock.
On the equity section of Stewart’s balance sheet, the total number of outstanding (30,000) and authorized (50,000) shares would be listed for external users to evaluate.
