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Home | Business Formations | Incorporation

Incorporation

13. Corporate Stock

Shares of corporate stock are a fraction of ownership in a company. The most popular types are "common stock" and "preferred stock".

The most basic level of stock is called "common stock." Common stock is an ownership share in a corporation with rights to vote on management and corporate policy. Common stock is not preferred over other classes of stock in terms of dividend payments or asset distribution. It is usually the only class of stock with voting rights.

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Sometimes, a corporation may issue another class of stock, in addition to common stock, known as "preferred stock." Preferred stock generally has greater rights over common stock when it comes to receiving dividends and/or corporate assets (in case the corporation is liquidated). Preferred stock can also have special voting characteristics, the ability to convert into common stock, the right to require that the company repurchase the stock at a later date (redemption) and other features allowed by state law.

When required, the articles of incorporation must state the maximum number of shares of stock that can be issued. There is no need to actually issue the maximum number of shares - you can issue a lesser number. For example, if a corporation has two shareholders, you can authorize a maximum of 1,000 shares, but give each shareholder only 250 shares. This way, you have the flexibility to add more shareholders. Otherwise, if additional shares were needed, the articles of incorporation would have to be amended. There is no maximum on the number of shares that can be authorized. However, some states, notably Delaware and Nevada, do base their annual corporation fee on the number of authorized shares.

In some states, notably Delaware and Nevada, the "par value" must be stated on the articles. Par value is a dollar value assigned to each share, regardless of its market price. Par value is simply for accounting and tax purposes, since stock can be sold at whatever price a buyer is willing to pay. The corporation, however, cannot sell stock for less than its par value. And since some states base their annual corporation fee on the total par value of the stock, it is advisable to choose a low par value, such as 0.01 or even 0.001 per share.

The sale of stock is subject to federal and state securities laws. Generally, if you are not advertising the sale and are dealing only with a small number (less than 35) of knowledgeable and sophisticated investors, you may be exempt from certain restrictions governing the sale of securities. The regulations involved are complex, and if you are considering selling shares in your corporation, you should consult with an attorney who is knowledgeable regarding the applicable state and federal securities laws.

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