How Many Shares of Stock Should My Corporation be authorized to issue
If you’re setting up a corporation with three or fewer shareholders, one of the questions you’ll need to answer is: how many shares of stock should the company be authorized to issue? This decision is important for structuring ownership and ensuring flexibility for your corporation as it grows.
What Does “Authorized to Issue” Mean?
The number of shares a corporation is authorized to issue refers to the maximum number of shares the corporation is legally allowed to create, an must be stated in the articles of incorporation. It’s like setting an upper limit on how many shares the company can create. Importantly, this doesn’t mean that all of these shares must be issued right away—many can be held back for future needs.
For example, if you decide that your corporation is authorized to issue 1,000 shares, the company can create up to 1,000 shares in total. However, you may choose to only issue 500 shares initially to the current shareholders, keeping the other 500 available for future needs, like bringing in a new investor or adjusting ownership stakes.
How Many Shares Should You Designate?
For a small corporation with three or fewer shareholders, we recommend authorizing between 1,000 to 20,000 shares. Here’s why:
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Flexibility for Ownership Changes
Authorizing a larger number of shares provides flexibility for making changes in ownership later on. If you decide to bring in a new shareholder or adjust the current ownership structure, having more shares makes it easier to allocate them without needing to amend the articles of incorporation. -
Simpler Division of Ownership
Designating a larger number of shares makes dividing ownership stakes easier. For instance, if you authorize 1,000 shares, you can allocate ownership among the three shareholders in any proportion you need, such as 500 shares to one shareholder and 250 shares each to the other two. -
No Excess Complexity
While having more shares gives you flexibility, there’s no need to authorize an extremely high number. A range of 1,000 to 10,000 shares is typically sufficient for most small corporations, allowing you to make future changes without overly complicating the corporate structure.
Example Scenarios
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One Shareholder: If you are the sole shareholder, it’s still wise to authorize more than just one share (e.g., 1,000 shares). This way, if you decide to bring in another investor or adjust ownership later, it will be easier to do so without needing to amend your company’s original documents.
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Three Shareholders: For three shareholders, authorizing 1,000 or more shares allows for easy division of ownership, whether equally (333 shares each) or in varying proportions (500, 300, and 200 shares).
What to Keep in Mind
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Par Value: Consider whether your shares will have a par value. If so, authorizing too many shares could impact the company’s initial capital requirements, so choose a number that balances flexibility with affordability.
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Future Growth: If you anticipate bringing in additional shareholders or expanding the business, authorizing more shares now will make it easier to allocate equity in the future without needing to amend your articles of incorporation.
Conclusion
For a small corporation with three or fewer shareholders, authorizing 1,000 to 10,000 shares gives you the right balance of flexibility and simplicity. It allows you to make adjustments in ownership as your business grows, without complicating your corporate structure.