How Many Authorized Shares Should I Use In My Articles of Incorporation?
From the last knowledge-based article, you may know what a founder’s stock is. But do you know how many authorized shares you can have in your Articles of Incorporation? Read to find out!
Understanding Authorized Shares
Let’s begin with understanding what authorized shares are. This is important as you will have to decide as a founder when you incorporate your company about the number of authorized shares.
With this said, “Authorized Shares” refers to the total number of shares that the corporation is allowed to issue under its Articles of Incorporation. Normally, a corporation authorizes up to 10 to 15 million shares upon incorporation.
Understanding Issued & Outstanding Shares
But what about issued and outstanding shares? Well, “Issued and Outstanding shares” refer to the number of shares that have been issued and are outstanding at a given time. This number cannot be greater than the total number of authorized shares. Although the number does vary for different companies, the total number of shares issued on the initial capitalization table (that is the stock option pool and the founding team) is between 5 and 10 million shares.
Do we authorize more shares than we issue?
Being a founder, you need to reserve shares under your stock option plan for future issuance. Not only is this done for the issuance process; it is also done for gaining more efficiency and practicality. But in case you issue all the authorized shares in the company, and you wish to grant more shares later on, you would need to authorize more shares. This situation would need a shareholder and board vote. And with this, a document needs to be filed to the state in which your company was incorporated.
Obviously, to file for this, you will need to pay the filing and the legal fees. On the other hand, if you have excess authorized shares already in your Articles of Incorporation, you can issue them with much less effort. All you would need is the approval of the board of directors for this.
And if you are wondering why we are using a large number of shares, then you should know that it is like this when it comes to the tech. industry. In many other industries, there are corporations that have a lower number of shares like up to 1000 shares as well. In this case, a person getting a 1% ownership would get only 10 shares.
This is just an example, but it is better to get 50,000 shares than just 10 for the 1% ownership in the company. In fact, the number of shares impacts the per-share price by lowering it, and also can have a huge impact on the taxes as well. But it is strictly advised to follow the common rules of the industry.
All in all, you now know what authorized shares are and how many shares should be in your Articles of Incorporation. With this information, you can now successfully get your company incorporated and get the authorized shares. Once you have done this, you will have to allocate the shares to the founders and other members. Learn more about this in the next knowledge-based article here!