Incorporation Glossary

Preferred stock is a type of stock that gives the holder additional rights over common stock holders. Typically, preferred stockholders receive dividends and assets (in the event of liquidation) before holders of common stock. Preferred stock can also have special voting characteristics and conversion or redemption rights.

A corporation only needs one class of shares (common stock). For many corporations, common stock is sufficient. However, if you wish to differentiate rights for separate holders, or if you intend to seek investors or venture capital financing, it may be advantageous to have preferred stock. This gives a corporation greater flexibility for special allocations of profits, voting power and other preferences.