2. 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
3. Method 1 of 2: Deciding Whether To Issue Stock
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.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 5 shares to
yourself, each share would be worth $1,000 each. Since you own 5 out of 5
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 5
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 (5 of yours, and 5
belonging to other investors), bringing your ownership down from 100% to
50%.
4. 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
5. 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.In addition, if you ever want
your ownership back, you will need to buy out the other
shareholders, which will cost much more than the money than
was initially raised by them in most cases.
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, and it could also mean you could
potentially see your profits decline if the funds raised by
issuing more shares does not lead to enough profits offset the
portion that will need to be paid to new shareholders
6. 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.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.
7. Method 2 of 2: Issuing Stock
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 5 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.
8. 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.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
9. 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 and only issue 1 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)
10. 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 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.
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 5 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.
11. Determine the amount of shares to issue. Once you know the
value of each share, the amount of capital you need, and the
amount of shares you are authorized to issue, it is possible to
determine the amount 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
12.
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 they can also make sure that
you are complying with any and all state and federal securities
law
13. 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 shareholders 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.
14. 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 actual 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