How to issue shares in Corporation?
Here we will cover all about company stock and how to issue shares in a corporation.
As a means to raise additional capital, companies issue stock. And this rings especially true with corporations, as it helps them fund their ongoing operations and undertake new future investments.
With the aim of earning profits from operations, a corporation is a legal entity set up by individuals, shareholders, and other companies. A corporation is permitted to own assets, borrow money from financial institutions, enter into contracts, remit state, and federal taxes, and to sue and be sued.
Incorporation is a legal process that is involved in the creation of a corporation. In this, all essential information is drafted such as name and location, legal documents that state the primary purpose of the business, and the number and types of shares issued. In the event of a legal claim or a lawsuit, the business entity gains a unique feature. This feature is that the owner is protected from being personally liable for any debt in the company, thanks to the process of incorporation and the structure of a corporation.
Types of Corporation
When a single or multiple individuals group together with the same goal in mind, a corporation is created. It can be formed as a not-for-profit or a for-profit entity, with a for-profit entity formed to generate profit and provide returns to the shareholders depending on the ownership percentage in the organization. For-profit entities form most of the corporations currently.
On the other hand, not-for-profit organizations dedicate themselves to a specific social cause such as religious, research, scientific, or educational purposes. Instead of distributing the proceeds among shareholders, they use that money to invest it in their operations to achieve the objectives of the organization.
To put it simply, there are three main types of corporations that include:
- C Corporation: As it contains almost every attribute of a corporation, the most common form of incorporation is a C corporation. The owners of a C corporation receive profit and are taxed on an individual basis, whereas the corporation is taxed separately as a business entity. This means that the profits of the corporation are taxed twice, once at the corporate level and then at the personal level. Other than this, C corporations have a lot of scope to grow. It can help you take your company public sometime in the future.
- S Corporation: Created almost in the same way as a C corporation, an S corporation is different in tax purposes and owner limitation. In an S corporation, you can have up to 100 shareholders. Additionally, the corporation is not taxed separately, and instead the profit and losses are taxed on the personal income tax returns of the shareholders.
- Non-Profit Corporation: These organizations operate without making profits, and this corporation is used commonly by educational, charitable, and religious organizations. This corporation is exempt from taxes and any donations, revenue, or contributions made to the organization are spent on the operations contributing towards the goals, future plans, or expansion of the organization.
How does a Corporation work?
Before a corporation can start operations, it needs a board of directors (BOD). During the AGM (annual general meeting), the shareholders elect the BOD members. Shareholders are limited to one vote per share. Also, they do not need nor are called for taking part in the daily operations of the company.
In a corporation, shareholders are allowed to be elected as a member of the board of directors or even the executive officer. Elected to stand and represent the shareholders, the board of directors are individuals that form a group given the duty of major decision making for the corporation that affects the shareholders. Policies and rules are formed by the board of directors to assist and guide the daily operations by the management of the corporation. The BOD members’ duty is to take care of the shareholders and their interests, which is why every policy they make and the guidelines they give should be in the interest of the shareholders and the corporation.
Advantages of a Corporation
A corporation has a lot of benefits including:
- Unlimited lifetime: the owners of a corporation are the shareholders, and it is managed by the board of directors. The continuity of the legal entity is not affected nor threatened by the inability of a shareholder to perform his duties or death. Only changes made in the company’s charter will affect it determining if it will be liquidated or extended.
- Separate legal entity: A corporation is considered to be a separate legal entity from the owners, that are allowed to conduct business, enter into contracts, sue and be sued, own properties, pay taxes, and borrow money
- Competent managers: In a corporation, the owners are not the ones that control or are involved in the day-to-day operations. The board of directors is voted in by the owners, who further hire professional teams to manage the business.
- Limited Liability: The owners of the corporation are not liable for the amount invested. Neither can the lenders and creditors hold them nor their personal assets liable for the owed payments.
- Source of capital: Corporations can make funds and increase capital by selling shares and issuing bonds.
- Easy Transfer of Ownership shares: Approval from shareholders is not required in public corporations if individual owners want to sell shares or stock.
Disadvantages of a Corporation
Along with the advantages, a corporation also has some disadvantages that include:
- Double Taxation: Tax is deducted twice at two levels, at the corporate level, and at the shareholder’s payments of dividends.
- Incorporation Costs: Compared to forming a sole proprietorship or a partnership, the process of forming a corporation is more expensive.
How does it dissolve?
Usually a corporate entity lasts until there is a major change in the charter or if the main reason it was founded has been achieved and the corporation reached its peak. If the change is done, the liquidation of the corporation starts which will be looked after by a liquidator.
Issuing shares in a Corporation
Here are the steps to issue shares in a corporation:
1. Decide how much capital to raise
You need to decide the amount of capital you want to raise by selling stock. Determining and setting an amount you want to raise from the sale of shares will have an effect on decisions in the future.
While determining the amount to raise, try to keep one objective in mind that you want to reach through the amount raised. Similar to banks, if you do not show a detailed plan to the investors that you will follow, it will be hard to convince them to buy stock of your corporation. Show them a picture of the future you are working towards to gain their interest and money.
2. Decide the number of shares to be issued
Usually the number of shares you can issue in the market are listed in the articles of incorporation. But if you are looking to issue more shares than those stated in the article, you can file an amendment in the articles and pay the fee for it. Theoretically, the number of shareholders in your corporation can be equal to the number of shares. But that’s not the case in reality as individuals buy more than one share in the company, which also affects the voting rights and the share price.
3. Decide corporation will be public or private
There are two types of corporations in terms of stock; public and private. Both of which can issue stock, but not in the same volume. Private corporations are not able to issue the same amount of shares a public corporation can. This is due to the fact that in a private corporation, the shares are private and are issued to a limited number of people such as owners, private investors, and founders. In a public corporation, you are practically allowed to issue limitless numbers of shares as they will be sold in the open market.
There are pros and cons to both types of corporations. Despite the limit on the number of stocks allowed to be issued, private corporations do not need to register with the SEC (securities and exchange commission), which means that there are fewer issues to face and deal with. The main con of a private corporation is that the limitation to shareholders means that there is a limit to raising funds by the sale of shares.
Comparatively, public corporations have to bear the cost of registering with the SEC, despite the ability to raise an endless amount of funds through shares. The SEC makes it mandatory that the corporation offer information about the financial state of the company with the existing and potential risks that they face when investing. Also, registration can be a lengthy process, but the main reason the SEC exists is for the protection of both the general public and corporations.
4. Set value for each share
When you issue shares in a corporation, dividing the amount that you want to raise by the number of shares you will issue will give you a value for each share. Also, remember that the value per share will impact the number of votes a shareholder gets. This will also affect the control of the corporation, eg. If a person buys a huge number of shares because of their low value, they will gain a majority of the shares and this have a significant impact on the choosing process of the corporation’s director. So watch out as the share value can have an impact on the control you have in the corporation.
5. Choose the type of stock
The final decision related to stock you will have to make is deciding the type of stock you want to issue. This can be influenced by the type of corporation, as in a C corporation you have the right to issue multiple types of shares, in an S corporation you are allowed to issue only one type of share.
While you issue stock, the main two types of shares that are common are preference shares and common growth shares. The common shares give the holder the right to vote with a high potential in the long term. Preference shareholders are not given the right to vote, but have a higher level of claim on the company’s asset. If somehow the corporation dissolves or is late on paying shareholders, the preference shareholders are the first to get paid before anyone else. You can choose other types of shares to issue in a corporation but these are the most common and best ones.
6. Prepare a shareholder agreement
A shareholders agreement is an agreement made between the company’s shareholders that states the methods and rules the company should operate within and managed; it also outlines the obligations, privileges, protections, and rights of the shareholders. This agreement is made so that the shareholders are protected and are treated fairly. This agreement is different from the bylaws of the company, a shareholders agreement is optional, whereas the bylaws are essential as they state the governing factors of the company and its operations.
It also outlines the legitimate and fair price of shares when they are sold. This allows current shareholders to form decisions regarding potential future shareholders and safeguarding the positions of minorities. This agreement should include the date, number of shares issued, restrictions on the transfer of shares (if any), rights for current shareholders to buy new shares, a cap table, outline the shareholders and their ownership percentage, and details of the payment if there is a company sale.
7. Issue stock certificates
A stock certificate represents the shareholder’s ownership in the company on a physical piece of paper. This paper details the information essential to the shares bought by a shareholder such as the number of shares owned, identification number, signatures, date of purchase, and a corporate seal. Nowadays they are issued electronically but it depends on the corporation. This is an important document as if any issues arise in the future, this can help the shareholder show their status in the corporation as the number of shares determines their voting rights.
Issue and Manage Your Corporation Shares on Eqvista
Issuing shares has become easier with Eqvista. You can now issue, manage, and track all the shares in your corporation easily with the help of our online equity management software. Everything is done electronically, allowing you to focus your time on growing your company and not on paperwork. The application would create electronic stock certificates for each issuance and you can even print them or download the PDF certificate to keep it. Learn more and try out the application to issue shares in your corporation today – it is FREE!