What is stock and how many shares should be authorized or issued?
The corporate law attorneys at the San Luis Obispo Toews Law Firm, Inc. would like to clear up some of the questions business owners have about offering stock and shares in their businesses.
Shareholders own a corporation and shareholders are holders of stock. Stock represents the percentage interest each shareholder owns in a corporation. For example, a corporation may have 1,000 shares and one shareholder may hold 800 shares, meaning the shareholder has an 80% ownership interest in the corporation.
Shareholders are typically entitled to their percentage interest of the company’s earnings and have the right to vote on issues concern the corporation, however, not all shares of stock are equal in the powers they grant the holder. For example, you may own 10 shares of Apple stock and although that gives you a small percentage interest in the corporation’s dividends, that does not necessarily allow you to vote on issues concern the business.
When a corporation is created, it is usually a privately held corporations owned by very few individuals. Some corporation, after being privately held for a period of time, become publicly traded companies where shares of stock are bought and sold through the stock market, becoming owed by the masses. One of the main reason’s corporations “go public” is to raise capital, often to support expansion. There are advantages as well as disadvantages in “going public” and if you are considering making an initial public offering (IPO), seeking the advice of knowledgeable, experienced security and corporate law is highly recommended.
The San Luis Obispo corporate law attorneys at Toews Law Group, Inc. is available to answer questions about how the stock is issued, how to issue more, and when or why you may want to issue additional stock.
When you incorporate a business in California, you are required to state the number shares it will be authorized to issue. In California, a corporation must authorize at least one share but may authorize any number. You, as the founder, can be the sole stockholder and own all authorized shares yourself, or you can issue shares to others who you desire to co-own the corporation. Family run corporations often issue shares among family members, and under certain circumstances, the Board of Directors may authorize additional shares of stock in the future.
When authorizing stock, it should be noted that some corporations may authorize different classes of stock, subject to certain restrictions. For example, S-Corporations are not permitted to issue more than one class of stock, although it may issue the same class designating some as voting and others non-voting shares without violating the IRS regulations requiring only one class.
There are two main classes of stock:
- Common stock—A great majority of stock issued, especially in a privately held corporation is known as common stock. Generally, those who hold common stock in a corporation (assuming they are voting shares) select the board of directors, vote on corporate policy and have a right to the profits (dividends) generated by the corporation.
- Preferred stock—Preferred stockholders have a higher claim to assets and earnings than common stockholders. Preferred shares may have a dividend that is paid before dividends to common shareholders. Preferred stock shareholders usually do not have voting rights.
When a corporation has a different class of stock or has more than one shareholder, it is strongly recommended that you consider establishing shareholder or buy-sell agreement(s) that will set forth the rights of the individual shareholders.
Whether you are looking to establish a corporate, need advice on raising operating capital or considering an IPO, the right legal advice imperative. Toews Law Group, Inc. practices corporate law in San Luis Obispo and statewide. The attorneys at the law firm can provide advice and guidance in a wide range of corporate law issues and are here to help navigate you through the intricacies of overlapping laws and the stacks of local, state and federal laws that regulate just about everything a business does.
For help with any corporate matter, contact Toews Law Group, Inc.
