What is Stock Corporation?
A stock corporation is a type of for-profit company. Each of its shareholders receives part ownership of the corporation through their shares of stock.3 min read
A stock corporation is a type of for-profit company. Each of its shareholders receives part ownership of the corporation through their shares of stock.
Understanding Stock Corporations
In a stock corporation, shareholders contribute capital to the company and are awarded shares, which are represented by certificates. These shares may allow them to receive a return on their investment through future dividends. The shares also give them voting rights on matters related to corporate policy, hiring directors, or other important decisions made during the corporation's annual meeting.
Since stock shares are divided up among the investing shareholders, ownership of the company is readily determined because the shares are considered transferable property. If a stockholder owns more than 50 percent of a corporation's shares, they have a controlling interest in the company because they own more than all other shareholders combined.
Owning stock shares in a corporation entitles a shareholder to certain rights, including:
- The right to make decisions
- The right to elect board members
- The right to receive dividends
For the company, selling stock means having income for the corporation. The company can use this income to finance startup costs, operations, and future growth.
Essentially, selling stocks is likened to the board of directors trading some of its decision-making power for financial benefit. It's important to note that only for-profit corporations sell stocks; non-profit corporations may have memberships instead of stock.
What are Stocks?
A stock represents a claim on a company's earnings and assets, which makes it a share of ownership in a company. As you obtain more stock in one particular company, your ownership stake increases. This is the most basic definition, however, as there's a lot more to understand about stocks than meets the eye.
For starters, shareholders don't actually own the corporation; they merely own shares. Corporations are treated like legal individuals because they're a special type of organization, meaning that corporations can own property, file their own taxes, borrow money, and be sued.
Since a corporation is considered a legal “person,” it can own assets, but its corporate property is legally separate from the shareholders. This distinction limits the liability of both the shareholder and the corporation. For example, if a company files for bankruptcy, a shareholder's personal assets are not at risk. You aren't even forced to sell your shares, but the value of those shares will likely fall dramatically.
In other words, if you own 33 percent of a company's shares, you can't claim to own one-third of the company itself. Instead, you own 100 percent of one-third of that company's shares.
For most shareholders, not having any management say in the company isn't a problem. The key benefit of owning stock is being entitled to a portion of that corporation's profits.
How to Start a Stock Corporation
When starting a corporation, there are many decisions to make about which kinds of stock to sell. If you're thinking about incorporating your own business, you'll need to make several important decisions:
- What type of corporation do you want?
- Do you want to sell shares of stock?
- How much stock do you want to sell?
- Will you offer the stock for sale privately or publicly?
After deciding how to structure your corporation, you need to create an Article of Incorporation. Include the initial number of shares you plan to issue and their price in this document. Once you've formally registered the company, you can offer the stock for sale.
Remember, if one individual owns more stock than any other person, that person has a “controlling interest” in the company. If you wish to retain controlling interest, you should maintain a greater number of stock shares than anyone else.
During the startup phase, your company may be too small to offer stock. In this case, you may switch from a non-stock to a stock corporation as needed. As the company grows, you can start to offer stock for sale throughthe public stock exchange. This first sell is called the initial public offering (IPO).
Certain types of non-stock corporations cannot sell stock. These include:
- Recreational clubs
- Labor organizations
- Civic leagues
- Business leagues
- Religious organizations
- Amateur athletic organizations
- Any other organization with a common social goal
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