Here are questions we hear frequently from our clients:
When I form my corporation, what are “authorized shares,” and how many shares should my corporation authorize?
How are authorized shares different from “issued” shares? How many shares should my new corporation issue?
- “authorized” shares
- “issued” shares
The number of shares authorized, the number issued, and the value of each share are usually determined in a fairly arbitrary manner by the owners when they form the new corporation.
We always recommend that our clients check in with their attorney and accountant if they have questions on what is appropriate for their new corporation. But here is what we see in typical situations.
In the Articles of Incorporation, companies typically state the number of shares that are “authorized.” Think of this as a pool of shares that the board has at its disposal and can “issue” (sell) to the founding shareholders and any other shareholders that might buy into the business at a later date.
So you’ll want a number of “authorized” shares that leaves room to sell more shares later on.
A local attorney recently told us she recommends to most of her clients that they authorize one million shares, even if they’re only going to issue a couple hundred. She told us that the number is arbitrary.
We typically see clients “authorize” a number of shares that is roughly 10 times the number they will actually issue to founding shareholders. Then, if par value is required by the state of formation, par value is set to match the contribution (total purchase price) desired.
Once the company is officially formed with the state, the Board of Directors is named. They then convene a meeting or agree by written consent to take a number of steps, one of which is to “issue” shares to the first shareholders.
These shares are purchased by the founders. The consideration can be cash, intellectual property such as a business plan, equipment, etc. The company needs to determine the value of each share. This number is also often considered arbitrary.
For example, let’s say there are 3 founding shareholders. If they each were contributing $1000 to the startup, and the ownership split was to be even between the three, they might each want to be “issued” 1000 shares, for a total of 3000 shares issued by the Board, with each share being worth $1.
Alternatively, it could be 100 shares each with the value set at $10 per share, or 50 shares at $20 per share…and so on. In the beginning, it’s arbitrary.
But in this example, since they want a little breathing room in case the company wants to sell shares to a 4th person later on, the company “Authorizes” 10,000 shares in its Articles of Incorporation. Or 100,000 or even a million shares. This is an arbitrary number, meant to be sufficiently higher than the 300 needed at the beginning.
As with all such matters, we always recommend you speak with an attorney. We’re not lawyers or a law firm, and we say this not only for our own protection: we say it for yours. The laws that guide these issues are complex and varied from state to state. What we’ve described here is a typical approach many of our clients take. Your situation may be different, so be sure to speak with an attorney.