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| Learn how to incorporate. An incorporating handbook online with step-by-step instructions and forms for every state. | ||
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Common vs. Preferred shares – There are basically two different types of stock your corporation can issue, common and preferred. Common stock is what corporations usually issue to shareholders. It’s what they trade on the New York Stock Exchange. The holders of common stock choose the directors of the corporation by voting their shares at an annual shareholders meeting. They also get to vote on other important matters that affect the corporation. Common stock holders of larger corporations get paid a quarterly dividend based on corporate profits. If there are no profits, a dividend is not usually paid. Preferred stock, on the other hand is more like a bond or promissory note. It carries a fixed dividend percentage rate that is stated on the face of the certificate like this “8% Preferred.” Holders of preferred stock get paid dividends first. If there are profits left after paying the preferred dividends, then dividends are paid to the common shareholders. That’s why it’s called preferred stock, dividends on it are paid first. There is a drawback however. As a trade-off for getting dividends first, preferred shareholders don’t get to vote on matters affecting the corporation. Preferred stock is nonvoting. I occasionally talk to a reader who wants to issue preferred stock. My advice is not to. Issue common stock only. If you want nonvoting stock, divide the common shares into two series, voting and nonvoting. Voting and Nonvoting Stock – There are two types of common stock, voting and nonvoting. Owners of voting stock get to vote on matters that affect the corporation, like the election of directors. Owners of nonvoting shares do not. Nonvoting stock comes in handy when you want to give someone ownership in the company but you don’t want them to have the power to elect directors. Nonvoting stock is good for issuing to your kids, in-laws, investors, or anyone who wants ownership without voting power. To show the difference between voting and nonvoting, you will divide the stock into classes and note the class on the face of the certificate. To have voting and nonvoting stock in your corporation, you should describe it in your articles of incorporation like this: “The corporation is authorized to issue 100,000 shares of stock described as follows: 50,000 shares of voting common stock without par value designated as Class A. 50,000 shares of nonvoting common stock without par value designated as Class B.” Par Value – Par value of stock is a bookkeeping term that basically equates to price. That is, the par value of a share of stock is usually the price per share that a shareholder must pay the corporation when buying the stock. It’s really an outdated term because most stock issued these days is “no par” stock. That is, it has no fixed price per share. It is sold to different shareholders at different prices depending on the needs of the corporation.
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