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Corporations issue shares of stock to raise money for their business. The shares that are issued represent the amount of money invested by the shareholders in the company. Shareholders have an ownership stake in the company and enjoy certain rights such as voting rights and the receipt of dividends. Therefore it is very important to consider how to issue stock when organizing your corporation.
Things You Should Know
- Determine how much capital you need to raise.
- Refer to the Articles of Incorporation for your business to find out how much stock you're authorized to issue.
- Use that information to determine the value for each share.
Steps
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Familiarize yourself with the basics of issuing stock. Issuing stock is one of the two basic ways to raise funding to grow your business. If your business is new, or is growing, capital is necessary, and issuing stock involves selling pieces of ownership in your business to investors in exchange for cash. [1] X Research source
- Issuing shares involves determining how much capital you need, and then determining an appropriate amount of shares to issue in order to raise that capital.
- If you need $5,000 initially for example, and decide to issue five shares to yourself, each share would be worth $1,000 each. Since you own five out of five shares, you would own 100% of the business. This would involve adding $5,000 of your own cash into your business, since you must pay for the shares.
- If you need another $5,000 later on, and you choose to issue an additional five shares to other investors (like family, for example) for $1,000 each again, you would see your ownership drop to 50%.
- This is because there are 10 shares outstanding now (five of yours, and five belonging to other investors), bringing your ownership down from 100% to 50%.
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Review the benefits of issuing stock. Other than issuing stock, the other way to finance your business is by relying on debt. Issuing stock has several advantages as an option, and may be appropriate for your business.
- Firstly, if you are a new business, or a business with a poor credit rating, acquiring debt may be too costly or impractical. Lenders often charge higher interest rates to businesses with little or poor credit.
- Issuing stock leaves you with more cash available compared to debt financing. When you take out a loan, you will need to not only use up your cash flow to repay the principal, but you will also be required to pay interest. This eats out of your profits each month.
- Acquiring more debt makes your business appear risky. Investors look at how much of your assets are owned by shareholders, and how much is owned by lenders. The higher the proportion owned by lenders, the more risky your company is deemed to be by both future investors and future lenders.
- If your business fails, your assets will need to go to pay back the loans outstanding before shareholders receive their share.
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Examine the disadvantages of issuing stock. Issuing stock means giving up a piece of your ownership in the business (also known as diluting your ownership), which also means sharing your profits, sharing decision making, and sharing in all future growth of the company. [2] X Research source
- In addition, if you ever want your ownership back, you will need to buy out the other shareholders, which may cost much more than the money that was initially raised by them.
- The more shares you issue, the smaller your ownership is in the business. This means you may have less say over the future course of the business.
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Consider alternatives to issuing stock. Using debt can also have advantages to your business. When you use debt, you do not dilute your ownership in the business at all, and the lender has no control or say over what you do with your business. You can also easily plan for loan payments because they do not fluctuate. [3] X Research source
- Another benefit to using debt is that interest payments are tax deductible, which can reduce your overall tax bill.
- In addition, once the debt is paid off, you get to keep all the profits that will be made from the loaned money, whereas with issuing stock it would need to be shared with shareholders.
- Issuing debt is a good idea if you have good credit rating, and a profitable and stable business.
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Determine how much capital you need. Chances are you are not issuing shares for no reason, and it is very likely you will need to the shares to fund some part of your business. For example, say you own a delivery business, and decide you need to add five new trucks to your fleet, at $20,000 per truck. You will then require $100,000 of capital.
- This amount will ultimately guide the entire process of issuing stock, as it will help you determine how many shares to issue and at what price per share.
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Determine how much stock the corporation is authorized to issue. The Articles of Incorporation (the formal documents which are provided when you start your business) will set out the maximum number of shares that the corporation can issue to potential shareholders. This does not mean that the corporation must issue all of those shares. New corporations will likely hold back shares so that, if necessary, it can raise capital at a later date [4] X Research source
- When you incorporate your business, you will be required to decide how many shares your business is authorized to issue. For example, the initially authorized amount may be 100 shares. You cannot issue any more than that without formal modifications to the Articles of Incorporation.
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Set forth the value of the shares that will be issued. Once you know the amount of capital you need, and the amount of shares you can issue, you can determine the value of the shares.
- If your business is just starting and you plan on putting your own money into the company and issuing shares to yourself, the value you choose to assign to each share ultimately doesn't matter. For example, if you are putting $100,000 of your own money in to fund a fleet of trucks, you can technically price each share at $100,000 per share (the par value, or stated value) and only issue one share.
- It is wise, however, to make the shares worth much less. If you have 100 shares that you are authorized to issue, issuing only one share to yourself means that once the remaining 99 of your shares are issued potentially to other investors, you will own only a very tiny portion of your business.
- If you make the shares worth $2,000 per share, for example, you would be able to issue 50 shares to yourself (to raise the $100,000 you need). This means you would have used half of the 100 authorized shares, which means that when the other 50 shares are issued later on, you will still own 50% of the business (due to owning 50 out of the 100 available shares).
- Understand that the par (or stated) value does not need to equal the sales price of the share. You can issue preferred shares, which give shareholders certain rights before common stock holders, which will require the shareholders to pay the par value as well as additional paid-in capital (the amount over the par value that is paid for the premium or preferred share). [5] X Research source
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Determine the class of the shares to be issued. There are basically two types of shares that can be issued — common shares, and preferred shares. While both shares allow the shareholder to own a piece of the business, they differ in terms of voting rights and other factors.
- A preferred share is usually a share without voting rights, but that receives first claim on the profits of the company, as well as on the company's assets in the event of a bankruptcy. For example, in the event that your business goes bankrupt and assets need to be sold, they would first go to the preferred shareholders to make sure they are properly compensated. The remaining money that is left over would then be distributed to common shareholders. Preferred shareholders may have unlimited, limited, or no voting rights depending upon the issue.
- Common shares have voting rights, and are allowed to participate in profits and in the proceeds from asset sales after the preferred shareholders are fully paid. For example, assume your business has $100 in profits, and each shareholder is entitled to $5 per share. If there are five preferred shares, they would receive their $25 first, after which the common shareholders would be paid. If the profits were $25, only the preferred shareholders would be compensated.
- Always consult with an accountant or lawyer to decide on the ideal mix of shares to issue. Every company will have different preferences depending on how much voting control they want shareholders to have, as well as how much flexibility they want with profits.
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Determine the number of shares to issue. Once you know the value of each share, the amount of capital you need, and the number of shares you are authorized to issue, it is possible to determine the number of shares your business should issue through some simple calculations.
- Begin with the amount of capital you need (for example, $100,000). If each share is worth $2,000, you can determine how many shares you need to issue by simply dividing the amount of capital ($100,000) by the value per share ($2,000). In this case, you would need to issue 50 shares to provide you with the amount of capital you need.
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Make sure you are in compliance with state and federal securities law. The law surrounding the issuing of stock is highly complex and detailed, and therefore it is absolutely essential to involve a lawyer if you are planning on issuing stock of any kind.
- Not only can a lawyer guide you through the technicalities of issuing stock, but he can also make sure that you are complying with any and all state and federal securities law.
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Draft the Stock Subscription Agreement. After you have successfully decided how much stock you need to issue, the value, and all the other relevant details, it is important to both create a document that details everything surrounding the transaction, and issue stock certificates to all the shareholders involved. This document is known as a stock subscription agreement.
- This document should not be crafted without consultation with a lawyer. While templates can be found online, it is important to make sure a lawyer looks over all details to ensure they work for your particular situation.
- The stock subscription agreement will outline who you are selling shares to, the amount of shares, the price per share, the date of the transaction, the amount of cash being received, and the payment method. It will also outline all the various risks and responsibilities associated with being a shareholder.
- After the agreement is made, you must print out hard copy shareholder certificates to provide your shareholders. This is a legal document that specifies the shareholder's name, the amount of shares held, the value the shares were purchased at, the business name, and any special rights granted to the shareholder. While templates can be found online, always consult a lawyer when crafting share certificates.
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Complete the transaction. Once you decide on all the details surrounding the issuing of stock, the actual issuing of shares is the simplest part. The issuing of shares consists of receiving the amount of cash specified in the stock subscription agreement (typically by check), in exchange for providing share certificates indicating ownership.
- You would, for example, receive a $100,000 check from your shareholder, and in turn issue certification indicating that the shareholder owns 50 shares at $2,000 per share.
- Note that on occasion, stock certificates can be issued in exchange for assets other than cash, and this is known as "non-cash consideration". For example, it is possible to issue shares to a supplier of machinery in exchange for machinery needed, instead of cash. This is useful if a very specific asset is needed more than cash, and if the provider is interested in being a shareholder. While this is not typical, this can occur if you you need a very particular asset and know a shareholder that can provide it. Discuss this option with your accountant. [6] X Research source
- The actual transaction of issuing shares is fairly simple for a small business, but for a large multi-million dollar corporation, the act of issuing shares often involves extensive consultation with investment banks and teams of professionals. This is because large corporations typically issue stock to the general public through a process called an Initial Public Offering, or an IPO, and banks are required to find buyers for the large number of shares.
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Warnings
- Regardless of the size of your corporation always check your federal and state laws regarding the issuance of shares of stock.Thanks
- The percentage of ownership that each shareholder has is based upon the percentage of issued shares not the percentage of authorized shares.Thanks
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References
- ↑ https://www.investopedia.com/financial-edge/1112/small-business-financing-debt-or-equity.aspx
- ↑ https://www.investopedia.com/financial-edge/1112/small-business-financing-debt-or-equity.aspx
- ↑ https://www.findlaw.com/smallbusiness/business-finances/debt-vs-equity-advantages-and-disadvantages.html
- ↑ https://www.businessownersideacafe.com/business_ideas/corporate_shares_ph1.html
- ↑ https://www.investopedia.com/terms/p/paidincapital.asp
- ↑ https://accountingexplained.com/financial/equity/issuance-of-shares-for-non-cash-items
About This Article
Article Summary
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Before you issue stock, make sure to determine how much capital you need and how many shares you can issue based on your Articles of Incorporation. Once you've done this, divide the capital you need by the number of shares you are willing to sell, even if you are buying the stock yourself. Decide whether common shares or preferred shares are right for your company by consulting with an attorney. Finally, draft a Stock Subscription Agreement with your attorney to issue the shares. For more from our reviewer on the advantages and disadvantage of issuing stock, keep reading!
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