Final Answer:
Authorized shares are the total number of shares available to sell as indicated in the company's articles of incorporation.
Step-by-step explanation:
Authorized shares represent the maximum number of shares that a company is legally permitted to issue, as stipulated in its articles of incorporation. This limit is established at the time of incorporation and can be adjusted through a formal process, often requiring approval from the company's board of directors and shareholders.
The authorization of shares does not necessarily mean that all these shares will be issued immediately; rather, it sets the upper limit for potential issuance as the company's capital needs evolve.Companies typically authorize a larger number of shares than initially issued to allow for future fundraising, stock options, mergers, or other strategic initiatives.
The difference between authorized shares and the issued or outstanding shares constitutes the unissued shares. These unissued shares can be issued later through various mechanisms such as secondary offerings or employee stock option plans. By having the flexibility to authorize more shares than initially needed, companies can adapt to changing financial requirements without the need for frequent amendments to their articles of incorporation.
In summary, authorized shares play a pivotal role in defining the scope of a company's potential equity issuance, providing the framework for its future financial strategies and growth. It reflects a prudent approach to corporate governance by allowing companies to have the necessary flexibility in managing their capital structure while adhering to legal and regulatory constraints.