Key Takeaways

  • Issuing shares must be done within the limit of authorized shares stated in a company’s formation documents.
  • Key decisions include choosing share classes, setting a share price, and determining ownership percentages.
  • A shareholder agreement helps protect against future disputes and outlines transfer rules.
  • Regulatory compliance at both federal and state levels is essential, especially for public offerings.
  • Shares can be paid for in various forms, including cash, property, or services (if allowed by the corporate bylaws).
  • Vesting schedules and repurchase rights can safeguard against premature ownership transfers.
  • Expert legal guidance is crucial to avoid tax or regulatory issues, especially during early structuring.

How to issue shares in a company? The first step in issuing shares is to examine the certificate of incorporation or articles of incorporation to determine the maximum number of shares that may be issued. A corporation may not issue any more shares than have been previously authorized.

What Are Issued Shares?

The owners of a company hold the authorized shares, or their ownership interest, in the company. The authorized shares are the originally distributed shares of a company, regardless of whether they are owned by institutional investors, insiders, or the public. A business is legally allowed to issue only the authorized shares of a business. The number of authorized shares is always equal to or greater than the number of issued shares.

Issued share may include two types of stock:

  • Publicly traded stock, issued to raise capital.
  • Insider traded stock, issued to compensate employees, board members, etc.

Retired shares are not included in the two types of stock.

A share of stock is only issued once and may be exchanged between investors an infinite number of times. Treasury stock is a portion of the total shares that a company keeps in its own treasury. Treasury stock comes from a repurchase, a buyback, or shares that were never issued to the public.

Recording Issued Shares

Capital stock is listed on a company's balance sheet and includes the total number of shares that were issued. The total number of shares outstanding is filed on a quarterly basis with the Securities and Exchange Commission (SEC). Also, the company's annual report includes the total number of outstanding shares.

Importance of Issued Shares

The market capitalization of the company can be calculated using the total number of issued shares and the current stock price. The various calculations help investors determine the performance and value of the company.

Comparing Authorized and Issued Shares

Authorized stock represents the maximum number of common shares that can be issued legally by the company. The number of authorized shares will most likely exceed the number of shares that were issued during a company's initial public offering. The initial corporate filing paperwork, created during the startup process, authorized a certain number of shares that may be issued. Issued shares refer to the number of shares of a corporation that are held by shareholders. The shares may be exchanged for any form of asset that the company believes will help capitalize the business.

How to Issue Shares in a Company: Introduction

The Companies Act of 1993 and the company's own constitution govern the company's right to issue shares. Depending on the guidelines in the constitution, or in the Companies Act, the organization's board may issue as many of the authorized shares as they desire. Upon incorporation (or registration), the next step is to issue the shares to the founding party members.

Drafting a Shareholders’ Agreement

A shareholders’ agreement is a legal document that outlines the rights and obligations of shareholders. It is essential for:

  • Clarifying how shares can be transferred or sold.
  • Setting rules for issuing new shares (pre-emption rights).
  • Defining what happens if a shareholder exits, dies, or becomes incapacitated.
  • Specifying vesting terms for founder shares to prevent early departure without consequence.

This agreement protects all parties and helps maintain corporate stability. Even for small or early-stage companies, having a solid agreement in place is a best practice.

Making Key Decisions About Your Stock

Before issuing any shares, corporations must define the structure of their stock. This process includes:

  • Determining Share Classes: Decide whether to issue common shares, preferred shares, or both. Common shares usually come with voting rights, while preferred shares might carry dividend preferences or liquidation rights.
  • Setting the Share Price: Founders often issue shares at a nominal price (e.g., $0.01 per share) during incorporation. However, pricing should align with the company’s valuation and long-term goals. Pricing shares too low can have tax and regulatory implications.
  • Deciding on Share Quantity: While some startups begin with 100 or 1,000 shares, the number can be increased through a stock split or board resolution. It's common to authorize a high number of shares to allow flexibility.
  • Allocating Ownership: Define how many shares each founder, co-founder, or investor will receive, based on percentage ownership.

Carefully structuring your share plan early on will help avoid conflicts and ensure smooth growth and investment opportunities later.

How to Issue Shares in a Company: Logging Notice of Share Issue

The business then must deliver a notice of issuance to the Registrar of Companies within 10 business days. Failing to notify the Registrar could result in a legal liability and financial penalty for all directors of the company.

How Are Shares Paid For?

A potential stockholder is not required to provide any consideration in exchange for the shares of a company unless it's expressed in the company's constitution. If consideration is required, it may come in the form of cash, future services, promissory notes, personal or real property, or even other securities. Prior to issuing shares, the board of directors should decide exactly what consideration is eligible to be exchanged for stock. The board of directors should make sure that the consideration received will appease the existing stockholders.

Best Practices for Paying for Shares

When issuing shares, ensure there's a clear transaction for consideration. Best practices include:

  • Issuing shares for cash and documenting payment with a check or electronic transfer.
  • Avoid issuing shares solely for services, unless carefully structured. This may trigger income tax for the recipient and raise red flags with tax authorities.
  • Use a Subscription Agreement: This document records the transaction—who bought how many shares, for how much, and when.
  • Document the valuation basis used if shares are sold above or below nominal value.

Proper payment documentation helps prevent future disputes and supports valuation consistency for investors and tax purposes.

How to Issue Stock: Method 1– Deciding Whether to Issue Stock

  1. Determine if you need to issue stock to raise capital.
  2. Analyze the benefits of issuing stock.
  3. Consider the disadvantages to issuing stock.
  4. Examine all alternatives to issuing stock.

How to Issue Stock: Method 2– Issuing Stock

  1. Calculate the amount of capital that is needed.
  2. Review the number of authorized shares that are available.
  3. Calculate the total value of the shares that will be issued.
  4. Determine if preferred or common shares should be issued.
  5. Calculate the total number of shares to issue.
  6. Stay compliant with federal and state security laws.
  7. Outline the Stock Subscription Agreement.
  8. Complete and fulfill the transaction.

Stock Options vs. Direct Stock Issuance

When offering ownership to employees, consider the pros and cons of stock options versus direct share issuance:

  • Stock Options: Offer the right to purchase shares at a later date, often at a set price. This is common in startups and helps retain employees.
  • Direct Issuance: Gives shares upfront, often subject to vesting or repurchase rights. May simplify tax treatment in early-stage companies.

While options offer flexibility, they also require additional administrative overhead and can trigger complex tax consequences. Direct share issuance may offer a simpler, tax-advantaged alternative when structured correctly.

Using Vesting Schedules and Repurchase Rights

To protect the company from founders or employees leaving prematurely, implement vesting schedules and repurchase rights:

  • Vesting: Shares become fully owned (vested) over time. A standard schedule is four years with a one-year cliff.
  • Repurchase Rights: If a shareholder leaves early, the company can buy back unvested shares or shares subject to repurchase. This keeps equity in the hands of active contributors.

These mechanisms ensure alignment between shareholder contributions and ownership, and help attract future investors by showing the team is committed.

Registering and Complying With Securities Regulations

Depending on the size and nature of the share issuance, corporations may need to comply with federal and state securities laws.

  • Federal Securities Laws: If shares are offered to the public or large groups of investors, you may need to register with the SEC. However, most small businesses qualify for exemptions under Regulation D or other rules.
  • State “Blue Sky” Laws: Each state has its own rules governing the offering of securities. Even if you’re exempt from federal registration, you may need to file notice or obtain approval from state regulators.
  • Private Offerings: If issuing shares privately (e.g., to founders or a small group of investors), you may qualify for exemptions that simplify the process.

It's important to stay compliant with both federal and state laws to avoid costly penalties. Consulting a qualified securities attorney is recommended.

Frequently Asked Questions

1. How do I decide how many shares to authorize when setting up a corporation? Start with a large number (e.g., 1 million) to allow flexibility. You only issue what’s needed, but having more authorized lets you bring in investors or employees later without amending your articles.

2. Can I issue shares without getting paid? Generally, shares must be issued in exchange for some form of consideration (cash, property, services). If improperly issued without consideration, shares may be invalid.

3. Do I need to report share issuances to any government agency? Yes. In most states, significant issuances must be recorded with the state and may need SEC filings depending on the nature of the offering.

4. What’s the difference between authorized and issued shares? Authorized shares are the maximum allowed per the corporation’s charter. Issued shares are those that have been distributed to shareholders.

5. Do I need a lawyer to issue shares in a corporation? While not legally required in all cases, working with a qualified attorney can ensure compliance, avoid tax issues, and help structure ownership correctly. You can find a vetted attorney on UpCounsel for assistance.

If you need help with how to issue shares in a company, you can post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.