Define Shares | Lovie — US Company Formation

When forming a corporation in the United States, you'll inevitably encounter the term 'shares'. Shares represent ownership in a corporation, much like deeds represent ownership of property. Each share signifies a unit of equity, entitling its holder, the shareholder, to a proportionate claim on the company's assets and earnings. Understanding how shares work is fundamental to grasping corporate finance, governance, and the very structure of your business entity. For entrepreneurs looking to establish a C-Corp or S-Corp, defining your share structure is a critical early step. This involves deciding on the number of shares authorized, their par value (if any), and the different classes of stock you might issue. This decision impacts everything from fundraising capabilities to voting rights and how profits are distributed. Lovie can guide you through these complex decisions during your company formation process, ensuring your corporate structure aligns with your business goals.

What Are Shares and Why Do They Matter?

In essence, shares are the smallest units of ownership in a corporation. When a company is incorporated, it is authorized to issue a certain number of shares. These shares are then typically sold to investors, founders, or employees in exchange for capital. Owning shares means you are a part-owner of the company, and your stake is proportional to the number of shares you hold relative to the total outstanding shares. This ownership grants certain rights and privileges, which can vary depending o

• Shares represent individual units of ownership in a corporation.
• Issuing shares is a primary method for corporations to raise capital.
• Share ownership grants rights, including voting rights and claims on assets/earnings.
• The structure of share issuance impacts corporate governance and investor relations.

Common Stock vs. Preferred Stock: Key Differences

Corporations can issue different classes of stock, with common stock and preferred stock being the two most fundamental types. Common stock represents the basic ownership unit. Holders of common stock typically have voting rights, allowing them to participate in electing the board of directors and voting on other significant corporate matters. They also have a claim on the company's residual profits and assets after all debts and preferred shareholders have been paid. However, common stockholder

• Common stock typically includes voting rights and claims on residual profits.
• Preferred stock often has priority for dividends and asset claims, usually without voting rights.
• Preferred stock dividends are typically fixed and paid before common stock dividends.
• The choice between common and preferred stock impacts risk, return, and control.

Understanding Authorized, Issued, and Outstanding Shares

When a corporation is formed, its articles of incorporation (or charter) specify the maximum number of shares the company is legally permitted to issue. This is known as 'authorized shares'. This number sets an upper limit, and the corporation cannot issue more shares than it has authorized without formally amending its charter, a process that typically requires board and shareholder approval and involves filing amendments with the state of incorporation, such as Delaware or Nevada. 'Issued sha

• Authorized shares are the maximum number of shares a corporation can legally issue.
• Issued shares are those the corporation has actually distributed to owners.
• Outstanding shares are issued shares currently held by shareholders, excluding treasury stock.
• The number of outstanding shares is key for calculating financial metrics like EPS.

Share Capital, Par Value, and Paid-in Capital

Share capital is the total amount of capital raised by a corporation through the issuance of shares. It represents the owners' equity in the company. This capital is crucial for funding business operations, investments, and growth initiatives. The composition of share capital is detailed in a company's balance sheet, typically broken down into common stock and preferred stock accounts. Par value is a nominal, arbitrary value assigned to each share of stock, as stated in the corporate charter. H

• Share capital is the total equity raised by issuing shares.
• Par value is a nominal, legally assigned value per share, often very low or non-existent today.
• Paid-in capital is the total amount received from shareholders for stock, exceeding par value.
• These elements are crucial for financial reporting and understanding ownership equity.

Issuing Shares During Company Formation

The process of issuing shares is a core activity when forming a C-Corporation or an S-Corporation. Upon incorporation, the company's board of directors is typically authorized to issue shares. This involves determining the number of shares to be issued, their class (common or preferred), and the price at which they will be sold or granted. For founders, shares are often issued at the very beginning, representing their initial ownership stake. This is typically documented through a 'stock issuanc

• Share issuance is a key step during C-Corp and S-Corp formation.
• Founders receive initial shares, often documented by board resolutions.
• External investors influence share structure, demanding specific classes and terms.
• Lovie helps ensure proper documentation and compliance for share issuances.

Tax Implications of Shares in the US

The way shares are handled can have significant tax implications for both the corporation and its shareholders in the United States. For C-corporations, dividends paid to shareholders from profits are generally taxed at the corporate level and then again at the individual shareholder level when received (known as 'double taxation'). This makes the timing and structure of dividend distributions important tax planning considerations. Conversely, S-corporations allow profits and losses to be passed

• C-Corps face potential double taxation on dividends; S-Corps offer pass-through taxation.
• S-Corps have strict rules, often limiting share classes to one.
• Shares issued as compensation are taxed as income to the employee.
• Profits from selling shares are subject to capital gains tax, with rates varying by holding period.

Frequently Asked Questions

What is the difference between shares and stock?

While often used interchangeably, 'stock' refers to the general ownership equity of a corporation, while 'shares' are the individual units that make up that stock. You own stock in a company, and that ownership is represented by a specific number of shares.

Can an LLC issue shares?

No, Limited Liability Companies (LLCs) do not issue shares. Ownership in an LLC is represented by 'membership interests,' not shares. Only corporations (C-Corps and S-Corps) issue shares.

What is the most common type of share issued?

Common stock is the most prevalent type of share. It typically grants voting rights and a claim on residual profits after preferred shareholders are paid, though it carries higher risk than preferred stock.

How many shares should a new corporation authorize?

The number of authorized shares depends on the business plan, funding needs, and future growth potential. It's often advisable to authorize a substantial number to avoid frequent charter amendments, but not so many that it dilutes founder control unnecessarily.

What happens if a company runs out of authorized shares?

If a company needs to issue more shares than it has authorized, it must amend its articles of incorporation. This requires formal procedures, including board and shareholder approval, and filing an amendment with the Secretary of State in the state of incorporation.

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