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Authorized vs. Issued S-Corp Shares

Original post by Christopher Carter of Demand Media

An S corporation has the ability to issue shares of company stock as a way of expanding the business or paying off existing obligations. An S corporation cannot issue shares to foreign individuals, foreign businesses, other corporations, limited liability companies and partnerships. Only certain trusts and estates can be shareholders in an S corporation. Also, individual shareholders must have United States citizenship or resident alien status.

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Significance

An S corporation cannot issue more than one class of stock. All shareholders of S corporation stock receive the same dividend amount per share because there are no preferred shareholders in an S corporation. However, shareholders of an S corporation may have different voting privileges. When an S corporation liquidates and dissolves the business, shareholders receive asset distributions from the company at the same time. A single person may own all the shares of an S corporation or up to 100 shareholders may have an ownership interest in the business.

Authorized

The number of shares an S corporation has the authorization to issue is listed in the company’s articles of incorporation, also known as a certificate of incorporation. There is no limit on the number of shares an S corporation can authorize, as long as the company complies with the rules of its state of incorporation. For example, an S corporation may be authorized to issue 100,000 shares, but 50 shareholders may own all of the shares.

Issued

An S corporation’s board of directors has the responsibility of issuing company shares. The number of shares issued by an S corporation’s board of directors indicates the number of authorized shares the company has sold to investors. S corporations can issue shares to certain trusts and estates, and to qualified individuals. The company does not have to issue all the shares the company has the authorization to sell. For instance, an S corporation may have the authorization to issue 50,000 shares, but the board of directors may elect to issue 10,000 shares instead of 50,000. This leaves 40,000 shares for the company to issue at a later date should the need to raise capital arise.

Considerations

When an S corporation wants to increase the number of shares the company has the authorization to issue, the company must amend its articles of incorporation. The new number of shares the company has the authorization to issue will appear in the amended articles. An S corporation has the ability to buy back previously issued shares, which can be retired or reissued to shareholders at a later time.


                   

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About the Author

Christopher Carter loves writing business, health and sports articles. He enjoys finding ways to communicate important information in a meaningful way to others. Carter earned his Bachelor of Science in accounting from Eastern Illinois University.


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