What to Issue and How Much
When incorporating your company it is important to understand the shares your company possesses, the right number of these shares to issue for your business venture, and the different ownership status with these shares. Many first time entrepreneurs lack clear, concise answers to their common questions about stock. AIL wants you to have the answers in order to run a successful business.
What is an issued share?
Issued shares represent the shares of stock that have actually been assigned or sold to shareholders.
What is an authorized share?
Authorized shares are different than issued shares. They are the total number of shares that the company is allowed to issue. The number of authorized shares is specified initially in the company's Articles of Incorporation - however, the total can be amended with shareholder approval at a later date if necessary.Generally, a greater number of shares are authorized than required in order to give the company the flexibility to continue to issue stock as needed over time.
How do I know how many authorized shares of stock to issue?
There is no magic number of shares that you should authorize when you form a company. The number depends largely on what you intend to do with the stock. However, you should be aware that authorizing a higher number of shares than the state minimum (amount varies by state) can lead to higher formation costs and additional fees, even if those shares are not issued. AIL suggests a standard of 1500 shares in Delaware and 1000 shares in most other states. We certainly can, and have, filed significantly higher amounts for our clients in the past.
What is the difference between common and preferred stock?
Both common and preferred stock represent ownership in a C Corporation. Preferred stock shareholders are paid dividends first and more regularly than common stock holders. Likewise, if the company liquidates or goes bankrupt, preferred shareholders are entitled to a portion of company assets before common shareholders. However, they generally do not possess the same voting rights that are granted to common shareholders, whose number of votes correlates to their number of shares. Preferred shareholders know the value of their projected dividends ahead of time and the amount they receive in dividend compensation does not increase with time. Alternatively, common shareholders may or may not receive dividends depending on how well the company is doing and the determination of the Board of Directors.
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