The number of shares a corporation is authorized by its charter to issue, but which have not yet been issued to stockholders. Also known as “unissued stock.”
When a corporation files registration paperwork in order to receive recognition as an independent legal entity, it is required to outline the number of shares the corporation is allowed to issue. If after this registration paperwork is completed the corporation decides that it wants to be able to issue more shares overall, this change must be formally reflected in an amendment to the corporate formation documentation. At any given time, this stated number serves as the maximum number of shares that MAY be issued in a corporation, not the number of shares that MUST be issued.
There are many reasons why a corporation may choose to issue a number of shares fewer than the maximum allowed by its charter. For example, it may wish to maintain the strength of shares that have been issued so far or may wish to reserve a number of shares allowed to be issued during an initial public offering. The formula used to calculate “shares authorized but unissued” is very simple: (shares authorized by a charter minus shares formally issued to stockholders = shares authorized but unissued). These shares do not become active (ie: entitled to dividends, entitled to cast shareholder votes in elections, etc.) until they are formally issued and owned by shareholders.
Executive One: “You’re telling me that because our charter states that we can issue 10,000 shares but we have only issued 1,000 that we can issue 9,000 shares at virtually any time?”
Accountant: “Technically, yes. But it is important to be cautious because every time a share authorized but unissued hits the market, it will dilute the strength of the original 1,000 issued shares.”