What is Authorised Share Capital? | Lovie — US Company Formation

When forming a corporation in the United States, you'll encounter terms like 'authorised share capital.' This concept is fundamental to understanding a corporation's ownership structure and its potential for future growth and financing. Authorised share capital, also known as authorised stock or stated capital, represents the maximum number of shares that a corporation is legally permitted to issue to its shareholders. This limit is established in the company's articles of incorporation, a foundational legal document filed with the state during the business formation process. It acts as a ceiling, defining the upper limit of equity the company can raise through stock sales without amending its charter. Understanding authorised share capital is crucial for entrepreneurs and business owners, especially when considering different business structures like C-corps or S-corps. While LLCs don't issue stock and therefore don't have authorised share capital in the same way, corporations do. The amount of authorised shares can influence investor perception, the ease of future fundraising, and the company's overall financial strategy. It's not just a technical detail; it has practical implications for how a business can operate and expand. Lovie assists entrepreneurs in navigating these foundational aspects of company formation across all 50 states, ensuring clarity and compliance from the outset.

Defining Authorised Share Capital: The Maximum Equity Limit

Authorised share capital is the total number of shares a corporation is legally allowed to issue, as outlined in its articles of incorporation. Think of it as the company's 'stock ceiling.' This number is set when the company is formed and can be increased later through a formal amendment process, typically requiring a vote by the board of directors and shareholders, and filing an amendment with the state of incorporation. For example, if a Delaware C-corp's articles of incorporation state it is

• Authorised share capital is the maximum number of shares a corporation can issue.
• It is defined in the company's articles of incorporation.
• This limit can be increased via an amendment to the articles.
• It is different from issued and outstanding shares.

Authorised vs. Issued vs. Outstanding Share Capital: Key Distinctions

It's crucial to differentiate between authorised, issued, and outstanding share capital, as these terms are often confused but have distinct meanings and implications for a corporation. **Authorised Share Capital:** As discussed, this is the total number of shares the corporation is permitted by its charter to issue. It's the theoretical maximum. **Issued Share Capital:** This refers to the shares that the corporation has actually distributed to shareholders in exchange for capital or other co

• Authorised shares are the maximum possible.
• Issued shares are those actually sold to investors.
• Outstanding shares are issued shares held by the public (excluding treasury stock).
• These distinctions impact market cap, EPS, and future fundraising.

How to Determine Your Corporation's Authorised Share Capital

The process of determining your corporation's authorised share capital begins during the business formation stage, specifically when drafting the articles of incorporation. This document, filed with the Secretary of State (or equivalent agency) in your chosen state of incorporation, formally establishes the legal existence of your corporation. The articles must specify the total number of shares the corporation is authorised to issue. This includes the number of shares and, if applicable, the pa

• Determine authorised shares during the drafting of articles of incorporation.
• Consider future capital needs and fundraising plans.
• Factor in ownership structure, founder allocation, and employee stock options.
• Evaluate state-specific franchise taxes and fees related to authorised shares.

Implications of Authorised Share Capital for Fundraising and Investment

The amount of authorised share capital has significant implications for a corporation's ability to raise funds and attract investors. A well-considered authorised share amount can facilitate smoother fundraising rounds, while an insufficient amount can create roadblocks and delays. When investors evaluate a startup or a growing company, they look at its capitalisation table and its potential for future equity financing. If a company has authorised only a small number of shares, and most of them

• Sufficient authorised shares streamline fundraising and investor attraction.
• Insufficient authorised shares necessitate costly and time-consuming amendments.
• Authorised capital impacts the ability to issue different classes of stock.
• Adequate authorised shares are crucial for IPO readiness and future equity incentives.

Changing Your Corporation's Authorised Share Capital

While the authorised share capital is set at the time of incorporation, it is not immutable. Corporations often need to increase their authorised share capital as they grow, seek additional funding, or prepare for significant corporate events like an IPO. The process for changing the authorised share capital typically involves amending the articles of incorporation. This is a formal legal procedure that requires adherence to the laws of the state where the corporation is registered. Generally,

• Authorised share capital can be changed by amending the articles of incorporation.
• The process typically requires board and shareholder approval.
• A formal amendment must be filed with the state, incurring fees.
• State laws dictate the specific voting thresholds and filing procedures.

Authorised Share Capital vs. LLC Membership Structure

While authorised share capital is a core concept for corporations (C-corps and S-corps), it does not apply to Limited Liability Companies (LLCs). LLCs operate under a different ownership structure. Instead of shareholders and stock, LLCs have 'members' who own 'membership interests.' The operating agreement governs the rights, responsibilities, and profit/loss distribution among members. An LLC's operating agreement outlines the ownership percentages or units of each member. There is no concept

• LLCs do not have authorised share capital; they have members and membership interests.
• LLC ownership is governed by an operating agreement, not articles of incorporation.
• Changes in LLC ownership are typically handled through operating agreement amendments.
• The choice between LLC and corporation structure impacts how ownership and capital are managed.

Frequently Asked Questions

What is the difference between authorised and issued shares?

Authorised shares are the maximum number of shares a company can legally issue, set in its articles of incorporation. Issued shares are those that the company has actually sold or distributed to shareholders.

Can authorised share capital be changed after incorporation?

Yes, authorised share capital can be increased or decreased by amending the corporation's articles of incorporation, which typically requires board and shareholder approval and a state filing.

Does authorised share capital apply to LLCs?

No, authorised share capital is a concept for corporations. LLCs have members and membership interests, governed by an operating agreement, not authorised shares.

What is the 'par value' of a share?

Par value is a nominal, often very low, monetary value assigned to each share in the articles of incorporation. It's largely a legal formality and does not reflect the market value of the share.

How does authorised share capital affect franchise taxes?

In some states, like Delaware, franchise taxes can be calculated based on authorised shares. However, alternative calculation methods often exist, and other states base taxes on income or net worth.

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