Legal Definitions - capital stock

Capital stock refers to the total number of shares a corporation is legally authorized to issue to investors, encompassing both common stock and preferred stock. This maximum limit is established in the company's foundational legal document, often called its corporate charter or articles of incorporation. While the charter sets this upper boundary, the company's board of directors decides how many of these authorized shares will actually be issued and sold to the public or private investors at any given time. The remaining shares are considered authorized but unissued, available for future fundraising or other corporate purposes. Changing the total amount of capital stock a company is allowed to issue typically requires amending the corporate charter, a process that often involves a formal vote by shareholders and can be complex and costly.

Here are a few examples to illustrate the concept of capital stock:

• Example 1: A Startup's Initial Authorization

  When "Quantum Leap Technologies" was founded, its corporate charter specified that the company was authorized to issue a maximum of 50,000,000 shares of common stock. This 50,000,000 represents Quantum Leap's capital stock. Initially, the founders and early investors might only receive 5,000,000 shares. The remaining 45,000,000 shares are held in reserve, allowing the company to raise additional funds in the future without needing to amend its charter immediately.

  This example demonstrates how the capital stock sets the initial legal ceiling for the total number of shares a company can ever distribute, even if it doesn't issue all of them right away.

• Example 2: Expanding Share Issuance for Growth

  "Global Logistics Inc." has 100,000,000 shares of capital stock authorized in its charter. Over many years, it has issued 90,000,000 shares to various investors. Now, the company plans a major expansion and needs to raise a significant amount of capital by issuing 20,000,000 new shares. Since they only have 10,000,000 authorized but unissued shares remaining, Global Logistics Inc. would first need to amend its corporate charter to increase its capital stock beyond the current 100,000,000 share limit before they can issue the full 20,000,000 new shares.

  This example illustrates the practical implications of reaching the authorized limit of capital stock and the formal process required to increase it when a company needs to issue more shares than initially permitted.

• Example 3: Including Different Share Types

  "MediCare Innovations Corp." has its corporate charter stipulating that it can issue up to 75,000,000 shares of common stock and 10,000,000 shares of preferred stock. In this scenario, the company's total capital stock is 85,000,000 shares (75,000,000 common + 10,000,000 preferred). This means MediCare Innovations Corp. cannot issue more than this combined total of both types of shares without formally changing its charter.

  This example highlights that capital stock encompasses all types of shares a corporation is legally allowed to issue, not just common stock, providing a comprehensive limit on its equity structure.