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Ownership of a Company

Number of shares the corporation is authorized to issue (for corporations)

At the time of incorporation, the incorporation documents specify the total number of shares that the corporation can issue. These are called the "authorized shares". The Board of Directors is responsible for deciding if and when to issue the authorized shares. When shares are actually given to the shareholders, they become issued, authorized shares.

When determining ownership percentages, the number of authorized shares is not a factor. All that is considered in determining ownership is the proportion of shares issued to each shareholder, not the actual number of shares.

It may be wise for the company to authorize more shares than it plans to issue. This will allow the company flexibility to issue more shares if a second round of financing is required. Designating a small amount of authorized shares in the articles will limit the company's ability to do this. The number of shares authorized can only be changed by officially amending the articles with the Secretary of State.

Note that designating a large number of authorized shares may increase the state filing fees in a limited number of some states. Our system will alert you during the application process if your state does this.

Designating the number of authorized shares is done in the Articles of Incorporation for C-Corporations and S-Corporations and does not apply to LLCs. In an LLC the shares are called "membership interests," and the shareholders of the LLC are called its "members."

Common Shares and different classes of stock

If the company has only class of shares, these shares are referred to as the common shares. If they are the only class of shares, the common shares must be given all the rights associated with shares:

  • the right to vote at the shareholder meetings,
  • the right to receive dividends (if and when distributed), and
  • the right to receive the company's remaining assets upon dissolution.

Different classes of shares may be created and vary based on differing rights and restrictions given to each particular class. In defining different classes of shares, it is important to note that at least one class of shares must have voting rights, at least one class must have the right to receive dividends and at least one class must have the right to receive the property of the corporation at its dissolution.

If a corporation has more than one class, the classes will usually have an alphabetical designation. For example, "Class A Common Stock," and "Class B Common Stock."
Another common way to differentiate between shares is to have one class of common shares and one class of preferred shares.

Preferred Shares

Corporations are required to issue common shares. However, corporations are not required to authorize any preferred shares.

The advantage of owning preferred shares, to shareholders, is that they have priority over common shareholders in receiving dividends. The preferred shareholders are entitled to receive a specified amount of dividends before the common shareholders receive any. The downside of preferred shares is that they are usually (but not always) non-voting. Further, the preferred shares usually have a “capped” right to receive dividends, meaning that the distributions have an upward limit.

The specifics of the rights and restrictions of preferred shares should be determined before issuing by the Board, or otherwise be designated within the corporate bylaws.