Issuing stock in a corporation offers tremendous potential for growth, because it helps a corporation to raise capital for new projects and investments without going to the bank for a loan.
However, the process of issuing shares for the first time can be tricky. In this guide, we’ll cover all the necessary steps to issuing shares in your corporation.
Make Key Decisions About Your Stock
Once you’ve decided that your newly formed corporation will issue stock, you have several important details to consider before you can actually make the first sale. Here are the five most important stock decisions you’ll need to make.
1. Decide how much capital to raise.
How much money do you want to gain by selling stock? Unlike a loan — where the bank or lender dictates how much money you receive — stock allows you some choice in how much money to raise.
Setting a dollar amount on how much money you want to make from your shares will impact later decisions. It’s also helpful to have a specific project or goal in mind as you set this number. Just as a bank won’t lend you any money without a detailed plan, you won’t be able to convince investors to buy your stock without a mental picture of how you’ll grow.
2. Decide how many shares to issue.
Technically, the number of shares your corporation can issue is listed in your articles of incorporation. If you want to issue more shares than that number allows, you can file an amendment to your articles to change it. Please note that most states charge a nominal fee to amend your articles.
In theory, the number of shares you issue can equal the number of shareholders you’ll have, although obviously some individuals might buy multiple shares. The number of possible shareholders will impact the voting rights of your members, so you’ll want to make a strategic decision.
For instance, if each share equals one vote and you have 50,000 shares, then each individual share has little voting impact. Issuing fewer shares would create a smaller voting base, and increase the value of each share.
For public corporations (see below), the initial number of shares is called your initial public offering, or your IPO. You can add more shares later on if you need to raise more money.
3. Set the value of each share.
The simplest way to set the value of each share is to divide the amount of money you wish to raise by the number of shares you’ll issue. However, keep in mind that the value per share can impact the number of votes one shareholder can have. Consequently, the share’s value could affect how much control you maintain in the corporation.
Think of it this way: if one person buys a large number of shares because their value — and as a result, their purchase price — is relatively low, that person could effectively gain a majority of the shares, and with a majority, they could effectively have significant impact on choosing the corporation’s directors. To avoid this, you can consider reducing the number of shares you issue and setting each share at a higher value.
Overall, if you’re having trouble setting the value of each share, you might want to get your business valued so that you can more accurately set fair prices on each share of your company’s stock.
4. Determine whether your corporation will be public or private.
In terms of stock, there are two types of corporations: public and private. Both types may issue stock, but not in the same capacity.
On one hand, private corporations cannot issue as many shares as public corporations, because private shares can only be sold to the corporation’s owners, founders, and private investors. Public corporations allow a practically limitless number of shares, because they can trade their stocks on the public market.
There are advantages and disadvantages to both types. Private corporations cannot issue as much stock, but they do not have to register with the Securities and Exchange Commission (SEC). In short, there is less red tape to deal with in a private corporation. The primary disadvantage is that the shareholder limit reduces the potential to raise funds.
In contrast, public corporations can raise nearly infinite funds with public investors, but that potential comes at a cost: public corporations must register with the SEC. The SEC requires public corporations to offer disclosures to their shareholders, which inform potential investors about the financial state of the company and what financial risks exist when investing.
The registration can be a bit of a hassle, but it serves to protect both corporations and the general public.
5. Choose what types of stock your corporation will issue.
The final stock decision you’ll need to make is what types of stock you want to offer. If you operate a C corporation, then you have the authority to issue multiple classes of stock, but S corporations can have only one type. The two most popular types are common growth stock and preferred stock.
Common growth stock shares grant voting rights to the shareholders, and they have the greatest potential for long-term growth. In contrast, preferred stocks usually do not carry voting rights, but they grant a greater claim to the corporation’s assets. If the corporation is late on paying dividends or somehow owes a debt to its shareholders, preferred stockholders are paid first.
Corporations can issue other stocks in addition to common growth and preferred stocks, but these are easily the most common options.
For example, common income stock is offered by businesses that are well-established, and they’re good for investors who would rather benefit from high dividends than quick growth. There’s also convertible preferred stock, which is quite similar to preferred stock, except for the stockholder’s ability to trade their shares for common stock by a set date.
Write Up a Shareholders’ Agreement
Once you issue stock, you grant your investors certain rights and privileges in return for their monetary investments. The shareholders’ agreement is a contract between your corporation and your shareholders, which defines the rights and privileges of the shareholders.
The shareholders’ agreement helps to maintain the division of ownership and control. Owning shares of stock grants certain rights, including voting and gaining a cut of the profits through dividends, but they don’t have limitless access to the corporation’s assets. For example, a shareholder can’t walk in and take an office chair because he or she “owns” the corporation.
The shareholders’ agreement sets out what rights the shareholders do have. The agreement sets out important details about your stock, including voting rights and procedures, shareholders’ rights to dividends, shareholders’ control over the board of directors, the transfer and creation of new shares of stock, and more. The agreement will also impact how and when new shareholders can buy into the corporation.
Essentially, the shareholders’ agreement protects each shareholder’s stake in the corporation, as it prevents the corporation from issuing so many shares of stock that voting rights lose their meaning. Meanwhile, it also prevents the shareholders from taking over the corporation completely.
Register With the SEC (Not Required for Private Corporations)
All public corporations must register with the Securities and Exchange Commission, which regulates the trade of bonds, stocks, and other investments. By registering, your stock essentially receives a seal of approval as a trustworthy business to invest in.
Registering your stocks can be done entirely online. To fill out the form, you’ll need to provide information on your company’s business activities and a description of the stock you’re registering. You’ll also be asked about the management of your company. Finally, you’ll be asked to provide a copy of your financial records, certified by a CPA. The registration fees are $121.20 per $1,000,000 in shares you issue.
The SEC also requires that you provide a disclosure to your potential investors, which includes financial information about your business and the stock you’re selling. A disclosure will accompany each stock you sell, helping to prevent deceit and fraud with the securities you offer.
The last thing you’ll need to cover is your certificates — you’ll need to provide an official certificate of ownership with each stock you sell. Corporations have traditionally offered paper certificates, but you can also offer an electronic version if you prefer. The important thing is that each shareholder receives an official form serving as proof of their stock ownership.
You can find more detailed information about the SEC’s requirements on their website. Once you’ve registered with the SEC, you’re ready to start selling your first shares.
Corporations are the only entity type that can issue stock. Shares of stock allow you to raise a significant amount of funds in a short timeframe. Doing so the right way can be complicated, but thanks to this guide, you’re now equipped to handle all the ins and outs of issuing stock.