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Authorized stock, also known as authorized shares, authorized capital, or authorized stock capital, refers to the maximum number of shares that a corporation is legally allowed to issue to investors or sell to the public. When a company is established, its founders determine the total number of authorized shares in its articles of incorporation or charter.

Key points about authorized stock include:

1. Maximum Number of Shares: The authorized stock represents the maximum number of shares that a company can issue. This number is specified in the company’s corporate documents and is agreed upon during the company’s formation.
2. Flexibility for Future Issuance: Not all authorized shares need to be issued immediately when a company is formed. The company has the flexibility to issue shares over time as needed, such as during fundraising rounds, employee stock option plans, or other equity-based transactions.
3. Share Classes: The authorized stock may include different classes of shares, each with its own rights and privileges. Common classes include common stock and preferred stock. The specific details of each class, such as voting rights and dividend preferences, are outlined in the company’s corporate documents.
4. Legal Requirement: The number of authorized shares is a legal requirement, and it may be adjusted through the approval of shareholders in certain circumstances. Changes to the authorized stock often require approval through a shareholder vote.
5. Limitations on Issuance: The issuance of shares beyond the authorized limit typically requires an amendment to the company’s articles of incorporation or approval from shareholders. This ensures that the company does not exceed the agreed-upon limit without proper authorization.
6. Initial Public Offering (IPO): When a private company decides to go public and conduct an initial public offering (IPO), it may need to increase its authorized shares to accommodate the larger number of shares required for the public offering.
7. Protecting Shareholder Interests: The concept of authorized stock is designed to protect the interests of existing shareholders by limiting the number of shares the company can issue without their approval. This helps prevent dilution of ownership.

It’s important to note that the number of authorized shares is not necessarily equal to the number of issued shares, which are the shares that have been actually issued and are held by investors. The difference between authorized shares and issued shares is the unissued or treasury stock, which the company can choose to issue in the future.

Authorized stock is a fundamental concept in corporate governance and plays a key role in shaping a company’s equity structure and capitalization strategy. The decision on the number of authorized shares is a strategic consideration made by the company’s founders and can impact future financing and ownership arrangements.