Many small businesses are set up as corporations and will often encounter the issue of stock while drafting the articles of incorporation. For some, figuring out how to structure your stock may be a little confusing. Below are a few main points you should keep in mind:
- The two primary types of stock often issued are common and preferred. Common gives no preference or priority over other classes of stock, and has rights of distribution, liquidation and voting. Preferred stock give specific benefits and rights to the holder over common shares including but not limited to priority during a liquidation or bankruptcy, special voting rights and protection against efforts to dilute the stock (i.e. stock splits, dividends, etc.).
- Decide whether to assign a par value (minimum dollar amount assigned to shares of stock) or non-par value (no value declared in articles of incorporation but set later by the Board of Directors when the value of the corporation goes up). Keep in mind that par value has nothing to do with market value and par value will not limit the cost of the shares. Check with state law regarding whether or not you are required to choose a par value amount when drafting your articles of incorporation and what amounts are recommended.
- You must issue a stock certificate and then record that issuances in a stock ledger which becomes part of your permanent records.
- Issuing stocks must comply with all federal and applicable state security laws. Be aware that you may also be required to file quarterly and annual reports with the SEC.
- Check with an attorney or tax advisor regarding specific laws that may additionally impact your individual situation.