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Authorized Shares and Stocks: A Basic Guide for Businesses
When starting a business, one important consideration is how to structure the ownership and control of the company. One aspect of this is determining the number of authorized shares of stock, or legal units of ownership, that the corporation will have.
What are Authorized Shares?
Authorized shares are the maximum number of shares of stock that a corporation can issue to shareholders. This number is set in the corporation's articles of incorporation, which is filed with the state where the business is registered. The authorized shares can be changed by filing an amendment to the articles of incorporation.
What are Stocks?
Stocks are units of ownership in a corporation. When a corporation issues stock, it sells ownership in the company to shareholders. Shareholders are entitled to certain rights, such as voting on important decisions and receiving a portion of the profits, known as dividends. Stocks can be issued as either common stock or preferred stock.
Common Stock vs. Preferred Stock
Common stock is the most basic form of stock and represents ownership in the company. Holders of common stock typically have voting rights, which allow them to elect the board of directors and vote on other important matters.
Preferred stock, on the other hand, represents ownership in the company but may not carry voting rights. Preferred stockholders are typically entitled to receive a fixed dividend payment before any dividends are paid to common stockholders. In the event of liquidation or bankruptcy, preferred stockholders may also have priority over common stockholders in receiving assets from the company.
Suggested Shares for Small Businesses
The number of authorized shares a small business should include in its articles of incorporation depends on various factors, such as the business's growth potential and financing needs. Typically, small businesses start with a high number, usually, 10 million authorized shares in the certificate of incorporation. Authorized shares are not the same as issued shares. Typically, when you start a company, you issue a certain portion of those 10 million shares are distributed to the founders of the company. This leaves room for a stock option plan and future financing where an outside investors comes in to the company and is going to invest in the company. Often, those investors likely want preferred shares and shares that will be converted to common stock. The conversion rate is 1 to 1 at first. Business owners will want to plan how many shares for stock option plan and shares to allocate and reserves for first round of financing. This helps so that you do not have to amend articles of incorporation. It is recommended to consult with a business attorney to determine the appropriate number of authorized shares for the company's needs.
Determining the number of authorized shares and issuing stocks is an important step when forming a corporation. It is essential to understand the differences between common and preferred stock and the rights and benefits that come with each type. Consultation with a business attorney can help ensure that the corporation is set up properly and that all legal requirements are met.
Remember, running a successful business is not just about the product or service, but also the legal structure that supports it. Careful consideration and planning in setting up a corporation can help ensure its success.
For more information about corporations and other business entities, or would like to set up your business, contact Curington Law, LLC at 312 766-6671 or online.