Shares represent a shareholder’s ownership interest in a corporation. A corporation issues shares to finance the company’s operating activities, to expand and pay existing obligations. The number of shares outstanding and the number of shares a corporation has the authorization to issue plays a significant role in determining a company’s ability to attract investors.
The number of shares a corporation has the authorization to issue appears in the company’s articles of incorporation, also known as a certificate of incorporation. Articles of incorporation must be filed with the secretary or department of state to begin the legal existence of a corporation. The articles contain basic information about a corporation such as the legal name and location of the business and the purpose for forming the company. A company cannot issue more shares than the company has the authorization to issue as indicated in the company’s articles of incorporation. Corporations are not required to issue all authorized shares, which allows the company to hold some shares until a later time when capital needs become more pressing.
A corporation issues shares to investors to raise cash and acquire assets. Corporations issue shares by selling authorized shares to investors, as explained by the Accounting Coach website. This means a corporation can be authorized to issue 50,000 shares, but the company can choose to only issue 5,000 shares. On the other hand, a corporation authorized to issue 50,000 shares may issue all 50,000 shares. Even when a corporation issues all authorized shares, the number of issued shares can never exceed the number of shares the corporation has the authorization to issue.
Outstanding shares indicate the number of shares held by shareholders. The number of outstanding shares can never exceed the number of issued shares or the number of authorized shares. For instance, a corporation that issues 20,000 shares has 20,000 shares outstanding. However, outstanding shares can be less than the number of issued or authorized shares. Let’s assume a company issues 1,000 shares, but buys back 200 shares. In this scenario, the company has 1,000 shares issued and 800 shares outstanding, since 200 shares have been retired or repurchased by the corporation.
Treasury stock is when a company repurchases its own shares from the company’s stockholders, as stated by the Cliffs Notes website. When a company purchases treasury stock, it does not exist as an asset to the company and treasury stock does not draw a dividend. A corporation can reissue treasury stock or terminate the existence of the treasury shares. Buying back shares may be beneficial for a corporation’s shareholders, since it decreases the number of outstanding shares. Decreasing the number of outstanding shares in this fashion increases a corporation’s earnings per share, according to the RightLine.net website.