What is Authorized Capital?
Authorized capital is the maximum number of common stock shares a company can issue. The company’s articles of incorporation set this number. If the company wants to issue more shares than authorized, it must change its articles first. Some call it authorized share capital, nominal capital, or registered capital.
What’s the Point of Having Authorized Capital?
It Keeps Things Under Control
When a company sets up a shop, it must put in writing how many shares it’s allowed to issue. This is the authorized capital. It’s like a limit—it can’t be exceeded without getting the official papers changed.
It’s a way to keep things in check. The company can’t just go crazy and issue a gazillion shares whenever it feels like it. Nope, they have to stick to the plan.
It Gives Shareholders a Heads Up
When people buy shares in a company, they want to know what they’re getting into. By setting an authorized capital, the company gives them a clue.
It’s like the company is saying, “Heads up, folks! We can issue this many shares, max. So you know what kinda slice of the pie you’re buying.”
Law requires it
The government likes to monitor these things. They want companies to play by the rules, so the law says companies must set an authorized capital and put it in their official paperwork.
It’s not optional. If you want to start a company, you have to do it—there are no ifs, ands, or buts about it.
How Do Companies Set Their Authorized Capital?
They Decide on a Number
When a company starts, the founders sit down and determine how many shares they think they’ll need to get it up and running.
They might do some math and crunch some numbers. But really, it’s just their best guess. They pick a number that seems right to them.
They Put It in the Articles of Incorporation
Once they’ve got their magic number, they have to make it official. They write it down in a particular document called the Articles of Incorporation.
It’s like a company’s birth certificate. It contains all the important details about the company, including its authorized capital.
They File the Articles With the State
The articles of incorporation don’t mean anything until they’re filed with the state. The company must send them in and get them stamped “approved.”
Each state has its own rules and fees for this, but once it’s done, bam! The company is legit, and the authorized capital is set in stone (well unless they change it later).
What Happens If a Company Wants to Issue More Shares?
They Gotta Amend the Articles
Let’s say a company is doing well and wants to issue more shares to raise cash. But, uh-oh, they’re already at their authorized capital limit!
No worries—they can fix that. But they can’t just snap their fingers and make it happen. Nope, they have to go through a process called amending the articles.
The Shareholders Have to Approve It
Usually, the shareholders must give their approval to amend the articles and bump up the authorized capital. The company will then call a special meeting and lay out its plan.
Then, the shareholders vote on it. If enough of them say, “Yeah, sure, go for it,” then it’s a done deal. The company can go ahead and increase its share limit.
They File the Amendment With the State
Just like when they first set the authorized capital, the company must inform the state about the change by filing an amendment to the articles of incorporation.
Once the state gives it the old rubber stamp, the new authorized capital is locked in and ready to roll.
Why Would a Company Want More Authorized Shares?
To Raise Money
The most common reason a company might increase its authorized capital is to issue more shares and raise money.
Maybe they want to expand the business, hire more people, or buy some shiny new equipment. Selling shares is a way to raise the cash they need to make these goals happen.
To Use Shares for Other Stuff
Companies don’t always issue shares just for the money. Sometimes, they use them for other purposes, too.
They might want to use the shares to buy another company, or they might want to give shares to employees as a bonus or to executives as part of their pay package.
Having extra authorized shares on hand gives them the flexibility to do this kind of work without having to amend the articles again.
