When forming a corporation for your real estate business, you’ll encounter technical terms that can feel overwhelming. One of the first and most important is authorized stock. This refers to the maximum number of shares a corporation is legally permitted to issue, as specified in its articles of incorporation. Think of it as setting the total potential ownership units for your company from day one. Understanding this concept is crucial for structuring your business for liability protection, flexibility, and future growth.
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What is Authorized Stock? A Guide for Real Estate Investors
Authorized stock is the maximum number of shares a corporation is legally permitted to issue, as outlined in its articles of incorporation. It’s a way to define the total potential ownership units of your company before you even issue the first share. This method helps you structure your business for growth, liability protection, and capital raising, making it a foundational concept for real estate investors, founders, and business owners alike.
Key Attributes
- Maximum Number of Shares: This sets the legal ceiling on how many shares the company can ever have in existence, unless the charter is formally amended.
- Legal Foundation: The number of authorized shares is a required piece of information for forming a corporation, establishing the basic ownership framework from day one.
- Flexibility for Growth: It provides a ready pool of potential equity that can be used to bring on partners, raise capital, or offer employee incentives in the future.
Key Stock Terminology
To understand authorized stock, you need to know these related terms:
- Authorized Stock = The total number of shares a corporation is legally allowed to create.
- Issued Stock = The number of authorized shares that have been distributed to shareholders.
- Unissued Stock = The number of authorized shares that have not yet been distributed (Authorized Stock – Issued Stock).
Application Example:
Here’s a step-by-step guide to understanding how this works in practice:
- Form your company: You create “Elm Street Properties, Inc.” and state in the articles of incorporation that you are authorizing 100,000 shares.
- Issue initial shares: You, as the founder, formally issue 60,000 shares to yourself. This is now the “issued stock.”
- Calculate unissued shares: You now have a pool of 40,000 unissued shares (100,000 authorized – 60,000 issued).
- Utilize unissued shares for growth: Six months later, you bring on a partner who contributes capital. You can now issue 20,000 shares to them from your unissued pool without needing to file new paperwork with the state.
Let’s say you authorized 100,000 shares and issued 60,000 to yourself. Your partner contributes capital for a stake in the company, and you issue them 20,000 shares.
- Total Authorized Shares: 100,000
- Total Issued Shares: 60,000 (yours) + 20,000 (partner’s) = 80,000
- Your Ownership: 60,000 / 80,000 = 75%
- Partner’s Ownership: 20,000 / 80,000 = 25%
This means your company still has 20,000 unissued shares available for future needs.
Why is Authorized Stock Important for Real Estate Investors?
Authorizing the right number of shares provides significant benefits, especially for structuring a real estate business for the long term.
Legal Protection
One of the main benefits of forming a corporation is liability protection. To maintain this “corporate veil,” you must observe corporate formalities. Properly authorizing and issuing stock is a fundamental formality that demonstrates your company is a legitimate, separate legal entity from yourself.
Capital Raising – Classic Other People’s Money (OPM)
It allows you to seamlessly bring on investors using other people’s money (OPM). When you find a great deal but need outside capital, having a pool of unissued shares means you can offer equity quickly and cleanly, documenting ownership without complex legal agreements.
Strategic Growth
Companies often use unissued stock to guide strategic decisions. If you want to acquire a larger single family rental portfolio, run the BRRRR method at scale, or move into mid-term rentals or Section 8 housing, you can use shares as currency to fund the deal or incentivize key team members.
Risk Mitigation
It can help you avoid costly delays. If you don’t authorize enough shares upfront, you’ll have to file an amendment with the state to increase the number later. This costs time and money, potentially causing you to lose a time-sensitive deal.
Key Takeaway: Authorizing a sufficient number of shares from the start provides a comprehensive framework for your business’s health, enabling you to protect yourself legally, raise capital efficiently, and make strategic decisions without friction.
How Authorized Stock is Used in Real Estate: Real-World Applications
Authorized stock is used across many areas of real estate to structure deals and build a portfolio.
Structuring Partnerships
Investors use authorized stock to define ownership splits cleanly. It’s essential for creating a clear and legally sound partnership structure.
- Case Study Example:
Two investors decide to form a corporation to buy rental properties. They authorize 10,000 shares. Investor A contributes the down payment and receives 6,000 shares (60% ownership). Investor B will manage the properties and receives 4,000 shares (40% ownership). The ownership is clear, documented, and legally binding.
Funding Larger Acquisitions
It is a valuable tool for pooling capital for bigger deals. An investor can bring in multiple capital partners, issuing shares from the unissued pool in proportion to their investment.
- Example: A 10-Unit Apartment Building
An investor finds a $1M apartment building but only has $100k of the required $250k down payment. She can bring in three other investors who each contribute $50k. If the company has enough unissued stock, she can issue each of them shares representing their contribution, allowing the group to purchase an asset none of them could afford alone.
Incentivizing Key Personnel
Investors can use stock to reward and retain important team members, like a property manager who consistently keeps units filled and costs low.
- Example: A Long-Term Incentive
You grant your rockstar property manager 500 shares of stock that vest over three years. This gives them a small piece of ownership, motivating them to treat the business as if it were their own and ensuring they stay with you for the long haul.
Alternatives to a Corporate Structure
While a corporation with stock is a powerful tool, there are other structures real estate investors use.
| Structure | Description | Best Used For | Key Advantage | Key Limitation |
| Corporation (S-Corp/C-Corp) | A formal legal entity with shareholders, directors, and officers. Ownership is held via shares of stock. | Investors planning to raise capital from multiple partners or seeking a formal, traditional business structure. | Clear ownership structure (shares) makes it easy to transfer equity and bring on investors. | More rigid formalities and administrative requirements (e.g., board meetings, bylaws). |
| Limited Liability Company (LLC) | A hybrid structure that combines the liability protection of a corporation with the flexibility of a partnership. Ownership is held via “membership units.” | Most real estate investors, especially those holding properties for the long term. | High flexibility in management and profit distribution; fewer formal requirements. | Ownership transfer can be more complex and is governed by a detailed operating agreement. |
| Sole Proprietorship | An unincorporated business owned and run by one individual. There is no legal distinction between the owner and the business. | A brand-new investor testing the waters with a single property. | Extremely simple and inexpensive to set up and manage. | No liability protection. The owner’s personal assets are at risk. |
Common Pitfalls and Limitations
While authorizing stock is straightforward, it’s important to know the limitations.
- Authorizing Too Few Shares: This is the most common mistake. It restricts your ability to grow and can create administrative hurdles when a great opportunity arises.
- Ignoring State-Specific Rules: A few states base their annual franchise tax on the number of authorized shares. Not checking this can result in a surprise tax bill.
- Failing to Issue the Shares: Authorizing shares means nothing until they are formally issued and recorded in the company’s stock ledger. This step is critical for proving ownership and maintaining the corporate veil.
FAQs: Authorized Stock
What does authorized stock stand for?
Stands for the maximum number of shares a corporation is legally allowed to issue to shareholders, as defined in its charter.
Can authorized stock be applied to an LLC?
No. LLCs do not have stock. They have “membership units,” which serve a similar function but are governed by a more flexible operating agreement.
What Is a “Good” Number of Authorized Shares?
A good number varies, but it’s wise to choose a high number that is easily divisible, like 10,000, 100,000, or more. This provides flexibility at little to no extra upfront cost in most states.
Conclusion
Incorporating authorized stock into your business formation process provides valuable insights into how to structure your company for future success. Whether you’re a solo investor or planning to build a team, understanding how to use authorized stock offers a long-term perspective that is key to making informed decisions. Start using this concept today to build a more strategic and scalable real estate business!
