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Many are confused or curious about early corporate ownership structures, so let's talk stock.

When you or your lawyer files the articles of incorporation with the Secretary of State, a company is born. But who controls the newborn entity? The shareholders, of course.

Most new companies only have a handful of founders, and they usually agree on almost everything at the outset. The fact of ownership of the shares is what gives them the power to elect directors and approve of actions like passing bylaws or approving of a sale of the company.

But what shares? From where? When did that happen? You probably don't remember getting a nice, framed certificate after filing your entity, because you didn't.

States don't issue certificates. Companies do. Until shares are issued or promised to someone, they remain the property of the company itself. These unissued shares are called "authorized shares."

So, even if your company only has one class of common stock, you will still need to be familiar with two kinds of shares: authorized shares and issued shares.

The number of authorized shares a company has is the maximum number of shares that it may issue to others. It's a ceiling. This ceiling is set in the articles of incorporation, and changes usually require filing an amendment to the articles with the Secretary of State.

The purpose of this is to prevent companies from (intentionally or not) overpromising shares to people. If it seems implausible that you'd lose count and give away five million and one shares, consider a situation where you have some preferred shares, some non-voting shares, and ordinary shares, plus a pool set aside for current and future equity compensation for employees. Now we're talking!

In my discussions with others, one of the most confusing things about authorized shares is that they don't figure into ownership percentage or dilution. If you and I each own 100 shares in a company with a million authorized shares, we still own it 50/50. There are only 100 issued shares, so our ownership won't be diluted until more shares are issued.

In brief, authorized shares are like the floorplan for your shares. They're called "authorized" shares because the State of formation won't let you issue more than that.

Issued shares are synonymous with shares outstanding. Someone owns them. These owners are the ones who factor into cap tables, voting, and dilution.

You can contact the author here, and follow @revolvethis and @gerritbetz on Twitter.