Who Can My Business Issue Stock To?
Getting a business off the ground requires meticulous legal planning and attention to detail. You are building something important and can’t afford to let laws and regulations get in the way of your company’s future.
One issue businesses consistently face is knowing how and when stock can be issued and to who it can be issued. The structure of your business plays a key role in determining how to proceed when issuing stock to founders, investors, partners, and employees.
Only Corporations Can Issue Stock
For your company to issue stock, there must be shareholders capable of doing so. This means Limited Liability Companies (LLCs) do not have the ability to issue stock as they do not have company stock to issue.
S Corporations and C Corporations have stock to issue to relevant parties. This can take place once the company has officially incorporated.
Issuing Stock to Founders
Part of officially incorporating your business should be articles of incorporation. This document carries a lot of weight, including defining how much stock will be issued to each founder. Founders will generally have at least 51% controlling interest in the company, leaving up to 49% of shares to be issued or sold to other shareholders.
This process looks similar to the topic of dividing equity among founders which we discussed in an article last month
Accredited vs. Non-Accredited Investors
Investors who put capital into your corporation are rewarded in the form of stocks but not all investors are created equally. It’s important to verify whether or not you are selling shares to an accredited or non-accredited investor.
The main difference between these two types of investors is that accredited investors have gone through a process to verify their net worth, income, and other qualifications to expand the types of investments they can make (such as Regulation D investments). Non-accredited investors are limited specifically to assets registered with the U.S. Securities and Exchange Commission (SEC).
Accredited investors have the ability to invest in smaller companies that have yet to go through the full process of becoming eligible to sell stock. This opens up additional investment funds otherwise unavailable to smaller businesses looking to grow beyond their current circumstances.
Essentially, this puts additional risk in place for accredited investors but creates more opportunities than those available to non-accredited ones. Companies benefit significantly from working with accredited investors as they open up more funding and provide verified information about the true spending ability of the investors themselves.
Ultimately, it’s up to you and your partners to decide how and when you should issue stock as long as you have met the necessary regulations to do so. Whether you are issuing stock to founders, partners, employees, or investors, it’s important to ensure you are doing so within the legal boundaries of your business structure.
At White Summers, we help companies through the process of issuing, selling, and exchanging stock. We understand the nuance that comes with doing so and are ready to help your business take advantage of these growth opportunities today.
By White Summers