Knowing the difference between authorized shares vs issued shares is essential in accurately calculating relevant ratios that portray the financial stability of a company.
Authorized shares and issued shares are both issued by companies but have a significant difference between them. They both represent two different values of the total shares in the company. The difference between the authorized shares vs issued shares can determine the share price at a certain time. It can also determine if the company can issue new shares to investors.
This article will discuss the comparison between authorized shares vs issued shares, highlighting their differences and similarities.
What are authorized shares?
Authorized shares are the maximum number of shares that a company is legally allowed to issue as defined in the company’s legal formation documents (i.e its articles of incorporation in the U.S.) or in the company’s charter for other parts of the world. These shares are also known as authorized stock or authorized capital stock.
Authorized shares are usually listed in the capital accounts section of the balance sheet and should not be confused with outstanding shares. Outstanding shares are the number of shares that the company has actually issued that are held by the shareholders.
How do authorized shares work?
As a company is formed, the maximum number of shares that the company would like to offer is decided on. The maximum number decided by the company that can be issued is the authorized shares of the company. They are the maximum number of shares that the corporation is legally permitted to issue to investors as per its own determinations.
The authorized shares are established in a company’s articles of incorporation and there is no limit as to the total number of shares that can be authorized within these documents for a larger company. Larger companies may have 100s of millions or billions of authorized shares. However, there is a limit to the number of authorized shares that can be designated for smaller companies has a set number of shareholders or no plans for expansion. These smaller companies may have only one million authorized shares for the founders and potential investors.
The shares that the company issue to the public to be traded on the open market are made up of all or a portion of the company’s authorized shares. The number of shares that are available to trade on the open market is the float shares. Also part of the authorized shares is the restricted shares which are the number of shares that are reserved for employee compensation and incentives.
This means that the total number of a company’s outstanding shares as seen in the balance sheet is made up of the sum of float and restricted shares. If the outstanding shares are less than authorized shares, the difference is the unissued shares which are what the company retains in its treasury. But for a company that issues all of its authorized shares, the outstanding shares will be equal to authorized shares. Therefore, outstanding shares can never exceed the authorized shares, because the total of the authorized shares is the maximum number of shares that the company can issue.
What are issued shares?
Issued shares are the subset of authorized shares that the company has sold which are held by the shareholders of a company, regardless of whether they are institutional investors, insiders, or the general public. These shares include the stock given to insiders as part of their compensation packages as well as the stock sold by the company publicly to generate capital.
This means that since authorized shares are the total amount of shares that a company can ever sell or issue, the issued shares are the portion of these authorized shares sold by the company or placed in the market, as well as the shares held in treasury. Issued shares are the opposite of unissued shares. Unissued shares are the shares of the company that have been authorized for future offerings but have not yet been issued.
How do issued shares work?
A company only issues a share once, after issuance, the investors can choose to sell it to another investor on the secondary market. There are times that the company buys back its own shares. These shares bought back by the company remain listed as issued shares, even though they become categorized as treasury shares. This is because the company may resell these shares.
Issued shares are different from outstanding shares or float shares (the number of shares that are in the market and available for purchase by investors). The outstanding shares are the shares held by shareholders and do not include repurchased shares (treasury shares). The issued shares, on the other hand, are the total shares issued by the company. This means that issued shares include treasury shares. Therefore, when the treasury shares are subtracted from the issued shares, it gives us outstanding shares. Meaning that the shares outstanding are the issued shares minus any shares in the treasury.
The number of outstanding shares is listed on the company’s quarterly filings with the Securities and Exchange Commission (SEC) and is also found in the capital section of a company’s annual report. Whereas, the issued shares are recorded on the balance sheet of the company as capital stock or owners’ equity.
Authorized shares vs issued shares
There is a significant difference between the issued shares vs authorized shares. The authorized shares are the maximum number of shares that a company is legally allowed to issue to shareholders while the issued shares are the total number of shares actually sold out to shareholders.
The authorized shares are established by the company’s articles of incorporation. They are shares that the company’s founders or board of directors have approved in their corporate filing paperwork. While the issued shares are shares that the owners or company have decided to sell in exchange for cash, which may be less than the number of authorized shares.
If a company decides to not issue all its authorized shares, its number of authorized shares will be more than its number of issued shares. Therefore, a company’s number of issued shares can not be greater than the number of authorized shares.
The shares issued by a company generate the value or assets given for founding a company or growing it later on. Companies may retain authorized shares for the purpose of conducting a secondary offering later, sometimes called a tender offering. They may also hold authorized shares for employee stock options (ESO).
The table below highlights the differences between authorized shares and issued shares.
|Authorized shares||Issued shares|
|These are the maximum number of shares that a company is legally allowed to issue as defined in the articles of incorporation||These are shares that the company has sold or issued to investors from the authorized shares|
|The number of authorized shares is established by the company’s articles of incorporation||The number of issued shares is done by the founder or later on by investment banks supposing that the company gets to an initial public offering (IPO).|
|Through the shareholder’s vote during the annual shareholder meeting, the total number of authorized shares can be altered in a situation where the company needs to issue more shares||The total number of issued shares can be altered or changed when there is a secondary stock market offering or a payment of the employee stock options. When the corporation has a share buy-back, the total number of issued shares can also decrease|
|The total number of authorized shares is usually higher than issued shares in order to allow the company to offer and sell more shares in the future should in case it needs to raise additional fund||The overall number of issued shares can never exceed the total number of authorized shares in a company|
|Authorized shares are usually listed in the capital accounts section of the balance sheet||The issued shares are recorded on the balance sheet of the company as capital stock or owners’ equity|
Relevance of authorized vs issued shares
The ownership of a company can be measured by identifying which investors were issued shares through a secondary offering or at a company’s startup. Moreso, ownership may also be measured by the fully diluted calculation. This involves counting outstanding and issued shares, together with the shares that may become issued if all authorized stock options are exercised.
Issued and authorized shares can be used as a forecast of the position shareholders may be in at a future date to measure ownership. This is called the working model calculation and all board members must use the same calculation when making plans or decisions for the business.
The number of outstanding or issued shares is always equal to the total number of authorized shares or less than it. Intentionally, companies usually keep these two figures different so the business has future flexibility to sell more shares in the future should in case it has financing needs.
Additionally, as a defensive mechanism, companies may intentionally hold back authorized shares. The retention of authorized shares allows the company to maintain a controlling interest. Moreso, if a majority of the company’s shares are yet to be issued, it can reduce the possibility of a hostile takeover.
The company can intentionally set aside the authorized shares that have not yet been issued as reserved shares. These reserved shares may be used as part of future stock option plans. The company may not issue the reserved shares unless under the stock option plan and these shares can also be issued through stock warrants to a third party.
- Authorized shares and issued shares are both issued by companies.
- They both represent part of the total shares in the company.