The term “authorized shares” refers to the total number of shares that the company is permitted to issue to all shareholders. The term “issued” or “outstanding” shares refers to the number of shares that have been issued to shareholders. For example, a corporation may authorize 1,000 shares but only issue 100 shares to Shareholder A. In that scenario, Shareholder A would be a 100% owner of the business. Later on, the corporation may issue another 200 shares to Shareholder B. In that scenario, Shareholder B would be a 66% owner of the business while Shareholder A would be a 33% owner.
If all of the authorized shares of a corporation are issued to shareholders, then the corporation will need to authorize more shares to be able to issue any other shares to a new shareholder. For example, if a corporation authorizes 1,000 shares, and 500 are issued to Shareholder A and 500 to Shareholder B. If a third shareholder, Shareholder C, wants to invest in the business in exchange for shares, then the corporation will need to authorize even more shares, since there are currently no available shares to issue to Shareholder C. That will necessarily cause the dilution of Shareholder A and Shareholder B’s shares.
You can authorize as many shares as you want for your new business, but please know that if your corporation is a Delaware corporation, it may be subject to franchise fees / taxes based on the number of shares it has authorized. California, however, does not calculate franchise fees or taxes based on total authorized shares.
The right answer for you will depend on what the purposes of your corporation are. If you are a founder of a business that you paln to own individually, without investors, co-owners, or others, then it is generally not necessary to authorize more than a total of 1,000 shares or similar number.
On the other hand, if you are forming a startup that is an investor-backed venture that you would like to head toward venture capital growth and/or an IPO, then the typical norm is to authorize 10,000,000 total authorized shares.
The exact number of shares your corporation should authorize is based on your company’s unique circumstances and facts.
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