How to Issue Shares in a Corporation
If you're wondering how to issue shares in a corporation, you're probably thinking about a company issuing shares as a way to gain the necessary capital.3 min read
If you're wondering how to issue shares in a corporation, you're probably thinking about a company issuing shares as a way to gain the necessary capital for business endeavors or expansion. Shareholders of public companies must approve this move beforehand, and there are a number of steps and limitations that must be considered before proceeding.
Procedure For Issuing Shares
The procedure for issuing shares includes:
- Creating a prospectus.
- Submitting the application of shares.
- Completing the allotment of shares.
- Issuing the call on shares.
The first step is developing a prospectus, which is a document that publicly invites potential investors to buy shares in the company. Before the document is published, a copy must be submitted to the Securities and Exchange Commission. If a business operates as a private company or privately issues shares, it does not need to draft a prospectus. The information within the prospectus includes information regarding the company's management, activity up to that date, details regarding the need for issuing shares, and other relevant information for a potential investor.
The application of shares is a form used by potential investors to submit their intention to buy shares in that company. If the number of issued shares is lower than that of requested shares, an oversubscription occurs. If, on the other hand, there are more shares than requested, it is called an under-subscription. The applications are issued to a designated bank, and the funds are only transferred when the procedure is complete.
The allotment of shares is when the issuing company selects the applicants that will be given the right to purchase the issued shares. The selected investors are notified through an allotment letter specifying the deadline for paying the price for the shares. Not all applicants will have successful bids, and those who are not accepted do not receive allotment letters. They also get back the application fee.
After the application and allotment phases, a call on shares is issued in order to collect any remaining shares. The number of calls depends on the number of installments, and the call amount should not be larger than the share's nominal value.
Issuing Stock as an S Corporation
Although S corporations can issue shares, the Internal Revenue Service has many restrictive rules and regulations that make S corporations an ineffective investment for some potential buyers. These restrictions must be well known by company founders so they can properly decide on what type of entity they want their business to be.
S corporations can only issue one type of stock, meaning it cannot issue one class of stock where investors receive dividends and another where they don't. The only exception the IRS makes to that rule is differentiating the stock by voting rights, meaning that issuing a class of stock with voting options and another without voting options is permitted. This is often used by family-owned companies when the stockholders want to transfer some of the stock to their heirs in order to lower the estate tax but do not want to also share control of the company.
Another limit imposed on S corporations is the maximum number of shareholders, which cannot be larger than 100. This rule also has an exception, as family members owning shares are counted as one person. People with at least one common ancestor within the past six generations, as well as the common ancestor's spouse or prior spouse, are considered family members. That way, an entire family, containing parents, children, grandchildren, and their children and grandchildren's spouses, is counted as one shareholder.
If any of those restrictions imposed by the IRS are violated, then an S corporation would lose its status and becomes a C corporation. The main difference is that with a C corp, the losses and gains are no longer directly attributed to the shareholders, and the business must pay corporate income tax. Any funds taken out of the company are counted as dividends.
Things become significantly more simple and straightforward when the corporation only has one investor. In this situation, the sole owner has the flexibility to control the company's size and share value according to his or her needs.
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