Business Law Topics: Corporations

What is the difference between Common Stock and Preferred Stock?

Common Stock is the default voting stock of a corporation. In addition, a corporation may have non-voting common stock and preferred stock. The most important quality of Preferred Stock is a preference upon liquidation; this generally means that preferred shareholders get paid first upon the sale of the company. For example, if a start-up that accepts $3 million of venture capital for 20% of the company is later acquired for $3 million, venture capitalists holding preferred stock might receive the lion's share of the $3 million despite their relatively small 20% share.

I am setting up a corporation. How do I decide how many shares of stock to authorize?

In theory, the number is arbitrary. A corporation with three shareholders could have three authorized shares or millions of authorized shares. Typical numbers are 100,000, 1 million and 10 million.

What is the difference between Authorized Shares (stock), Issued Shares and Treasury Stock?

Authorized Shares means the total number of shares of stock the company is authorized to issue by its Articles of Incorporation. In contrast, Issued Shares means the number of shares of stock actually issued by the corporation to shareholders. Treasury Shares means Issued Shares held by the corporation, but note that Treasury Shares are typically held only by publicly traded companies. A note about terminology: California corporate law refers to stockholders as shareholders while Delaware corporate law refers to stockholders. The meaning is the same.

What is Par Value? Do I need to assign a par value to my company’s stock?

Par Value is a minimum stock price set by the corporation, such as $0.01 (1 cent) per share. Par Value an archaic concept that is not applicable to California corporations; however, Par Value still exists under Delaware corporate law.

I plan to start a new venture, but I don’t want to waste money on legal fees if this start-up dies on the vine. When is the right time to incorporate or set up a limited liability company (LLC)?

The main reason for setting up a corporation, S Corporation or limited liability company (LLC) is to protect investors from the company’s liabilities. So, when you are close to accepting investments or entering into contracts on behalf of the company, it is time to establish the company as a legal entity (corporation, S corp. or LLC). Another reason to establish a corporate structure (or limited liability company) is to make the rights of founders and employees clear and to establish a tax basis in founder’s stock.