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Setting up a corporation, understanding shares of stock

If the corporation’s founders want to become an “S” corporation, or seek venture capital or angel investment, then they need to understand how to structure their corporation carefully to avoid expensive mistakes. When you decide to incorporate a business corporation, one of the first questions asked is how many shares of stock will it have, and what par value. For a one-person business, this is not a critical question, as any amount of stock above one share will work just fine. If the business will be seeking more investment, though, the question becomes much more important, and there are many issues that much be understood by the founder(s).

A corporation is a legal entity owned by its shareholders, who own the shares of stock. Stockholder is another term for shareholder, and the terms are interchangeable. When a corporation is set up, it must tell the Secretary of State (and the public) the total number of shares that it is authorized to issue to its shareholders. When the corporation holds its organizational meeting after being incorporated, the directors of the new corporation will issue shares of stock to the initial shareholders, in exchange for the money or services that will become the start up capital of the corporation. At this point, the value of the corporation and the value of the shares will be exactly the same.

The number of shares of stock issued to these first shareholders may be any number up to the number of authorized shares. If more shareholders will be wanted in the future, it may be wise to issue substantially less than the total authorized number.

Shareholders have the authority to elect the directors to set corporate policies and govern the corporation, and are allowed to hold a meeting to replace directors. However, shareholders generally have few other rights. In return for this their liability to the corporation’s debts is limited to the amount of their investment in their shares

 
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