Starting your own business involves many decisions, from choosing the right corporate structure to allocating equity. Proper planning is crucial for building success and reducing management costs down the line. If you opt for setting up a traditional c-corporation (in this case, the traditional C-Corporation), you'll need to consider how to structure ownership for long-term growth.

What Are Authorized Shares And Issued Shares?

In traditional C-corporations, generally speaking, shares may be divided among three broad categories: authorized shares, issued shares, and treasury shares. Authorized shares are stated in the company's incorporation document filed with the State (typically called the Certificate of Incorporation) and are the maximum number of shares the company is lawfully permitted to issue without amending the original Certificate of Incorporation. Issued shares represent the portion of shares that a company has either sold or placed in the market. Treasury shares are the shares that a company repurchases from shareholders.

How Many Shares Should Be Issued Or Reserved?

Many founders may be inclined to issue all the authorized shares amongst themselves initially, but this may hinder future equity distribution. If the company is planning on giving equity to investors or employees, the company would either need to buy a portion of shares from certain existing shareholders or increase the number of authorized shares. Increasing the amount of authorized shares in a company requires an amendment to the original Certificate of Incorporation. Depending on the laws of the state of incorporation, an amendment typically requires approval of both the shareholders and the Board of Directors, state filings, and the associated fees.

Alternatively, keeping a portion of authorized shares in reserve provides more flexibility for the corporation. For instance, if a company intends to raise capital, it may be worth reserving a certain number of shares for issuance to investors in the future. Additionally, many companies opt to set up an employee incentive plan to give options to employees. Depending on the stage or nature of the business, some corporations may reserve around 10% – 30% for employee options to help attract talent. The number varies based on each company's specific business needs. Managers should consider reserving enough portion to meet the hiring or investment needs until the next Certificate amendment.

How To Issue Shares?

Complying with corporate formalities is paramount when authorizing and issuing shares. Depending on the applicable state laws and a corporation's specific incorporation documents, issuance of shares typically requires the following steps:

  • Obtaining the Board's approval for the issuance (by vote at a meeting or by written consent);
  • Executing a stock purchase agreement or grant agreement documenting the sale and issuance of the shares;
  • Giving consideration in some form paid for the shares;
  • Issuing stock certificates (if applicable); and
  • Complying with applicable federal and state laws and securities regulations.

Additionally, if the shares are subject to vesting in the future, the shareholders may want to consider making a Section 83(b) election with the IRS for certain tax considerations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.