The Pros and Cons of Issuing Stock in Your Corporation

If you’ve structured your business as a corporation, you may have done so with the idea of issuing stock or shares in your company. You may also have dreams of becoming a public company someday. You may therefore be eager to get started with stock offerings.

The downside of issuing stock, however, is that you’re giving away some ownership of your business, and those stockholders may or may not have a voice in how you run and grow your business. As a result, you have the added pressure of making your business a success not only for yourself, but also for the stockholders.

Nevertheless, the advantages of issuing stock in your corporation are equally significant. You can probably raise more money by issuing stock than by borrowing. And when you issue stock, unlike borrowing, you aren’t obligated to make monthly payments to stockholders.

So, how do you get started?

First, you’ll need to figure out the number of shares available in your company. You may have already done this and recorded it in your Articles of Incorporation. If you haven’t, then start by determining the company’s net worth and what percentage of ownership you believe each share is worth.

Next, take a look at your current list of potential stockholders. What percentage of stock do you believe each should own? Did they contribute money? Did they contribute expertise? Weigh the contributions of each person carefully to come up with percentages. Each state also has requirements as to the minimum amount of stock that can be issued, so make sure you’re in compliance with state laws.

You also need to decide what class of shares you’ll offer — preferred or common. S corporations can only issue one class of stock, while C corporations can issue more than one. Common stock holders have one vote per share.

It’s vital to draw up a shareholder agreement. The shareholder agreement documents the shareholder’s rights and voting power in the corporation. Does the shareholder have any say in the organization or management of the company? There should also be a section that deals with any disputes that may arise between shareholders and officers, and what steps should be taken to remedy the dispute. In addition, the agreement should cover what happens if a shareholder dies or transfers stock, or if the company wants to buy out its shareholders.

Finally, you’ll need to get stock certificates printed and issued to all stockholders. If you want to gift shares of stock to thank someone, or you’re looking for a way to shift your income, you’re basically transferring the ownership of stock shares. The recipient needs a brokerage account to receive the stock; if the recipient is a minor, someone age 18 or older will need to set it up. Also check with your accountant for all the specifics regarding the gift tax you’ll need to pay on such offerings.