Types of Shares of Corporation and Their Rights

Key Takeaways

• Shares of corporation represent units of ownership and come primarily in two forms: common and preferred stock, each with distinct rights and risks.
• Common stock grants voting power and potential for higher returns but ranks last in liquidation. Variations like Class A or Class B may offer different voting rights.
• Preferred stock offers priority in dividends and liquidation but usually lacks voting rights. It includes subclasses such as cumulative, callable, convertible, and participating.
• Specialized shares—like treasury, restricted, and founder’s shares—serve unique corporate purposes, such as retaining control, rewarding founders, or managing employee equity.
• Corporations may issue classes and series of stock with tailored rights, preferences, and restrictions to attract different types of investors.
• Shareholder rights often include voting, dividends, access to corporate records, and derivative actions, which vary based on share type and corporate bylaws.

What are the different types of shares in a corporation? The two main types of shares in a company consist of common (or ordinary) and preferred shares.

Types of Shares: Common Stock

In order to meet their financing needs, it's quite common for corporations to issue preferred or common stock to raise capital. The type of financing raised will greatly depend on the ownership structure of the business. Publicly traded companies tend to prefer a simple structure with only one class of common stock. This is because it is easier to analyze the finances of the company and provides greater liquidity.

The most universal and frequently issued type of stock is common stock. Common stock will usually receive a dividend payout and confer voting rights. Investors will typically receive one vote per owned share. Investors are allowed to vote for the election of board members. Historically, common stock has returned a higher yield than corporate bonds.

Generally speaking, at low levels of risk, potential returns tend to be low as well. High levels of risk are typically associated with high potential returns. Common stock tends to be thought of as a higher risk because a company has the potential to go out of business, causing the investor to lose their entire investment. If a company liquidates or goes bankrupt, preferred shareholders and bondholders will get paid first. Any remaining funds will be used to pay common shareholders.

Common stock shareholders have control over the corporation through their voting rights. They're able to vote on:

• Electing board members
• Major corporate issues
• Stock splits
• Corporate objectives and policy

Voting rights will usually vary based on the type of stock that the company issues. For example, a Class A share may have five votes for each share of common stock, while a Class B stock may only have one vote per each share owned.

Each common share stock is equivalent to every other common share stock in its class. Therefore, ownership rights are consistent, and the only significant difference between the two shareholders is the number of shares that are owned.

A business must return shareholders' capital to them when the shareholders have voted to liquidate the company. Outside of this scenario, a company's management does not have to be concerned with losing the stockholders' capital.

Stockholders are allowed to buy and sell shares of stock without the approval of other shareholders. On the other hand, shareholders in a privately held company may have restrictions on their shares. Also, shareholders are allowed to be employees of the company. The company's board of directors will set the organization's policies and also represent the interests of the shareholders.

Other Variations of Common Shares

While all common stock represents ownership in a corporation, companies often issue multiple classes of common shares to balance control and investment. For example:

• Class A and Class B shares: These are identical in terms of ownership percentage but may differ in voting rights. Founders and insiders often hold Class A shares with multiple votes per share, while Class B shares offered to the public have limited voting power.
• Restricted stock: These shares are typically granted to employees or executives with vesting conditions. They cannot be sold or transferred until certain performance or time-based conditions are met.
• Treasury stock: These are previously issued shares repurchased by the corporation. While they carry no voting rights or dividends, they can be reissued to raise capital or used for employee compensation plans.
• Founder’s shares: Often issued at a nominal price to the company’s founders, these shares may carry enhanced voting rights or liquidation preferences to ensure long-term control.

Such distinctions enable corporations to customize ownership structures—balancing the need for capital with the desire to maintain control and strategic decision-making power.

Types of Shares: Preferred Stock

Preferred stock shareholders do not have voting rights in the organization. Preferred shares tend to offer a higher dividend than common shares. There are many types of preferred stock, including:

• Callable
• Cumulative
• Convertible
• Participatory

For example, cumulative shares will entitle the stockholder to dividends in arrears. Meaning that if the payment of dividends has been skipped or suspended, they will receive their portion before common stockholders receive their share. Convertible shareholders are allowed to exchange their shares for common stock at a future point under specific conditions. Preferred stock is thought of as being similar to a corporate bond, but without the voting rights.

The two main advantages of being a preferred shareholder include:

1. Guaranteed with a fixed dividend payment in perpetuity
2. If the company is liquidated, the preferred shareholders are paid before common stockholders

Callable shares are preferred shares that the issuing company can choose to buy back at a fixed price in the future. This amount is usually paid at a premium. Please note, a good way to think of preferred stock is that it's somewhere in between a common share and a corporate bond.

Preferred stock usually has no maturity date, meaning it doesn't have an end date and it will get paid in perpetuity. It's also carried as equity on the organization's balance sheet. In contrast to a bond, preferred stock is issued with a par value, doesn't have voting rights, and is offered at a fixed distribution amount.

Common shares are ranked below preferred shares in a company's capital. Preferred shareholders will always receive their dividend payment before common stock shareholders, no matter the situation.

Shareholder Rights and Protections

Owning shares of a corporation grants shareholders a range of legal rights and benefits, which can differ based on the class of shares held. These typically include:

• Voting rights: Common shareholders vote on major corporate matters, such as electing the board of directors or approving mergers. Some preferred shares may include limited or conditional voting rights.
• Dividend rights: Shareholders are entitled to a portion of the company’s profits, distributed as dividends, according to the terms of their shares.
• Preemptive rights: Certain shareholders have the right to purchase new shares before they are offered to the public, helping them maintain their ownership percentage.
• Information and inspection rights: Shareholders can review certain corporate records, financial statements, and meeting minutes.
• Derivative actions: Shareholders may file lawsuits on behalf of the corporation if directors or officers breach fiduciary duties.

Understanding these rights helps investors evaluate the level of control, income potential, and legal recourse associated with their shares.

Classes and Series of Preferred Stock

Corporations can create different classes and series of preferred stock with unique rights, preferences, and restrictions outlined in the articles of incorporation. These tailored options help attract investors with varying risk tolerances and income expectations. Examples include:

• Participating preferred stock: Holders receive their fixed dividend plus additional distributions if common shareholders receive dividends beyond a certain amount.
• Non-participating preferred stock: Holders receive only their fixed dividend and liquidation preference, with no participation in additional profits.
• Adjustable-rate preferred stock: Dividends fluctuate based on a benchmark interest rate, offering protection against inflation or changing market conditions.
• Perpetual vs. term preferred: Some preferred shares pay dividends indefinitely (perpetual), while others have a fixed redemption date.

These distinctions are particularly valuable for corporations seeking flexible financing options while maintaining predictable dividend obligations.

Frequently Asked Questions

1. What are the main types of shares of a corporation?
   The primary types are common stock, which carries voting rights and potential for capital growth, and preferred stock, which prioritizes dividends and liquidation but usually lacks voting power.
2. Can a corporation issue more than one class of common stock?
   Yes. Many corporations issue Class A and Class B shares with different voting rights to maintain control while raising capital from investors.
3. What happens to shareholders if a corporation is liquidated?
   Preferred shareholders are paid first, followed by common shareholders. If debts exceed assets, common shareholders may receive nothing.
4. Are shareholders entitled to dividends automatically?
   No. Dividends are typically declared at the discretion of the board of directors. Preferred shareholders, however, often have guaranteed dividends.
5. Can shareholders sue corporate management?
   Yes. Through derivative actions, shareholders can sue on behalf of the corporation if directors or officers engage in misconduct or breach fiduciary duties.

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