One of the advantages of incorporating is the ability to raise money by issuing shares. Your articles of incorporation can authorize as many shares as you think you'll need. If you're a privately held corporation with no plans to go public, setting the number of authorized shares at one per owner is fine. If you hope to go public at a later date, authorizing a few million shares has its advantages.
There's no legal requirement for the number of authorized shares. Your articles of incorporation set the number. It's usually smart to authorize more than you need initially.
Rules on the Number of Authorized Shares
Legally, there are no rules on the number of authorized shares you should issue, Lloyd & Mousilli advises. There's no need for rules because the number, practically speaking, doesn't matter. If you issue 10 million shares, someone who holds 1 million shares owns 10 percent of the company. If you only issue 1,000 shares and someone buys 100 of them, they still own 10 percent.
This applies to S corporations as well as C corporations. There's no maximum or minimum number of shares for an S corporation any more than for a C, UpCounsel says. There is a limit on shareholders, though: An S corporation can only have 100 of them. Nor can an S corporation issue preferred and common stock. The only different classes of stock allowed are that some have voting power and other shares don't.
The rule on the number of authorized shares is set in the company's articles of incorporation. The articles authorize a set amount of shares: 100, 5,000, 15 million, depending on your preference. You don't have to issue that many immediately – it's a matter of preserving your options for the future, explains the Startup Company Lawyer.
Suppose you have five founders, counting yourself. You set the number of authorized shares at 15 million, award each of you 1 million, then issue the remaining 10 million in your IPO later. If you'd only authorized 5 million shares, Cooley Go says, issuing more would require board and stockholder votes, plus paperwork with your state of incorporation. That costs you in both time and filing fees.
Authorizing the Number
It's perfectly legal to set the number of authorized shares by throwing darts at a board. Practically, though, it's worth giving the number some thought. It's true that the number of shares doesn't affect a stockholder's power – 10 percent of the company is 10 percent no matter how many shares that is – but that doesn't make it meaningless.
If you start issuing stock or stock options to recruit key employees, they may find big numbers more impressive. An option on 1 percent of a 500-share company means five shares; with 5 million authorized shares, a 1 percent option means 5,000 shares. It's the same amount of power, but even savvy employees may feel more impressed at the larger number.
Another factor is the money you expect to raise from your IPO. Suppose the articles authorize 5 million shares; you and the founders divide up 3 million and reserve the rest for the IPO. If the initial price is $20, the IPO will raise $40 million if all 2 million shares sold. If that's not enough, perhaps you need to authorize more shares.
FAQs
Your articles of incorporation can authorize as many shares as you think you'll need. If you're a privately held corporation with no plans to go public, setting the number of authorized shares at one per owner is fine. If you hope to go public at a later date, authorizing a few million shares has its advantages.
How do you determine the number of authorized shares? ›
The number of authorized shares is specified in the company's articles of incorporation. You can also see the number in the capital accounts section on the balance sheet.
How many shares of stock must you have to be an owner of a corporation? ›
A corporation can't be a corporation without at least one share of stock. So you must have at least one shareholder, and one share of stock. You can have (authorize) as many shares of stock as you want, however, this may increase your filing fees in some cases.
How many shares can a company authorize? ›
There's no limit to the total number of shares that can be authorized within these documents for a large company. But smaller companies that don't plan to expand or that have a set number of shareholders are limited as to the number of authorized shares they can designate.
How many shares of a company do you need to be on the board? ›
While every board member is a shareholder, not every shareholder is automatically a board member. Shareholders who own a certain percentage of the company's shares (usually 10 percent or more) are eligible to serve on the board. However, they must be nominated and elected by the other shareholders.
Why is the number of authorized shares important? ›
Authorized stock plays an important role in acting as a limiting device against the ability of the management to issue additional shares that may alter the balance of control of the shareholders.
Can a company change the number of authorized shares? ›
Authorized shares refer to maximum number of shares that a corporation is allowed to issue. This number is usually referenced in a company's Articles of Incorporation. The only way to increase authorized shares is to make an amendment to the aforementioned document.
What is the 10% shareholder rule? ›
(B) 10-Percent shareholder The term “10-percent shareholder” means— (i) in the case of an obligation issued by a corporation, any person who owns 10 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote, or (ii) in the case of an obligation issued by a ...
What is the 5% shareholder rule? ›
If a group beneficially owns shares in excess of five percent of the class of covered securities, all members will be subject to Section 13(d) reporting requirements, even if any individual member beneficially owns less than five percent of such class.
How many shares can an LLC have? ›
A limited liability company (LLC) cannot issue shares of stock. An LLC is a business entity structured to have either a single or multiple owners, who are referred to as the LLC's members.
While there is no magic number that suits every startup, many companies find that authorizing around 10 million shares strikes a good balance between flexibility, employee motivation, and attracting investors. This is the number investors typically expect to see.
How many shares should I start my C Corp with? ›
The decision is up to you. If the company will be just yours you don't need many shares. For example you can choose 1,000 shares or 10,000 shares. If you know you will be taking investors and maybe become publicly traded one day you might need millions of shares.
How many authorized shares can an S Corp have? ›
In California, a corporation must authorize at least one share but may authorize any number. You, as the founder, can be the sole stockholder and own all authorized shares yourself, or you can issue shares to others who you desire to co-own the corporation.
How many shares should I create for my company? ›
However, if you think that you're likely to sell shares at a later date, you should issue more when you set up your company. You will own them until the time comes to sell them to a new shareholder. Issuing shares in quantities of 10 is a popular option, with many companies choosing to issue 100 shares, or even 1000.
How many shares should a startup start with? ›
When the need arises, a majority of shareholders or the Board of Directors can vote in favor of allowing new shares. How Many Shares Should We Authorize? Regardless of your initial funding, a new startup's sweet spot is usually 10 million authorized shares.
How many shares should a small company have? ›
Typically a startup company has 10,000,000 authorized shares of Common Stock, but as the company grows, it may increase the total number of shares as it issues shares to investors and employees. The number also changes often, which makes it hard to get an exact count.
How many shares makes you an owner? ›
Any amount of stock makes you an owner. To be exact it makes you a part-owner. (Talking about public companies now)If you have the majority of the stock, then your vote most likely weighs much on the direction of the company.
How many shares of stock should a corporation have? ›
Many experts suggest starting with 10,000, but companies can authorize as little as one share. While 10,000 may seem conservative, owners can file for more authorized stocks at a later time. Typically, business owners should choose a number that includes the stocks being issued and some for reservation.
Does owning a stock make you an owner of a company? ›
Stockholders own shares of a company, but the level of ownership may not present the benefits and responsibilities sought after. Most shareholders have no direct control over a company's operations, although some have voting rights affording some authority, such as voting for the board of directors members.
How many shares does a company owner have? ›
While a principal shareholder holds 10% of shares, a majority shareholder is a person or entity that owns and controls more than 50% of a company's outstanding shares. In some cases, a majority shareholder is the company's founder or a descendant of the founder within a family-owned business.
