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How to Decide on Number of Shares of Stock to Authorize

With the ownership of a corporation, you must decide how many shares of stock the corporation will be authorized to issue.  First, think ahead and decide how many shareholders you may have.  Don’t worry, if your corporation grows so large and becomes the next Facebook or Google and it goes public, you can always amend your articles of incorporation and increase this number of shares.

Think of the ownership of your corporation as a pie.  Now, how many pieces do you want to cut into the pie and what percentages?
One Piece (one stockholder) – If you are going to be the only owner of the corporate pie, then this issue is not that important.  You could have one share of stock or one million shares and the result is the same.  Whatever is issued to you means you will own 100% of the stock outstanding.

Two or More Pieces (two or more stockholders) – If there is going to be only two owners of the corporate pie, then this issue can still be pretty simple.  If each owner is going to own 50%, your corporation could be authorized only to issue 2 shares of stock and that would work.  However, if partner/owner 1 was going to own 75% of the stock and #2 was going to own 25% of the stock, you would need to authorize at least 4 shares of stock.  If the ownership percentage was a less devisable (i.e. 2/3rds  & 1/3rd) or even worse (83.45% to #1 & 16.55% to #2), then you would need many more shares.
And if you are going to have many more shareholders, especially with odd percentages of ownership, the number of shares will need to go much higher.

01 But don’t go too high ?

It would seem that more is better when it comes to the number of authorized shares your company should be authorized to issue. However, that is not always the case. Several states charge filing/registration fees (and sometimes annual fees) based on the number of shares of stock a corporation is authorized to issue. For example, Virginia Corporations must pay a “charter fee” of $2500 if a corporation is authorized to issue 1,000,000 or more shares; whereas 25,000 shares cost only $50.

Even if your formation state does not charge more, if your corporation might file for foreign authority in another state that does (charge more), it might be wise to keep your authorized shares at a lower level. You could always consider amending articles later and increasing the number of authorized shares when it makes sense to do so.

02 Check out these BiZTerms (concerning Stock) ?