Stock for a California Corporation
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When you form a California corporation, you issue shares of stock to your owners, who are known as shareholders. It is these shares of stock that designate ownership in a corporation. In general, a shareholder exchanges assets, such as money or property, in return for stock.
California State Law
State law allows a California corporation to issue more than one class of stock, and different series of stock within each class. However, all series of stock within a class must have the same rights and privileges.
Understanding Shares of Stock
Authorizing and Issuing
When you file Articles of Incorporation, you are required to list the amount of stock you are authorizing. Authorizing is the same as creating. If you authorize 100 shares, you are creating 100 shares of stock.
Those shares, however, have not yet been issued. In other words, they have not been given to anyone. You will issue stock initially at your first shareholders meeting. It is at this meeting that the founders of your company are issued stock, usually in exchange for assets.
After this initial shareholders meeting, additional stock can be authorized and issued by your Board of Directors.
Classes and Series
Stock can be divided into different classes (although it does not have to be). The most common example of this is when a corporation offers both Common Stock and Preferred Stock. Common and Preferred are different classes.
The purpose of having different classes of stock is that each class offers different rights. Generally, Common Stock gives the shareholder a vote at shareholder meetings and potential dividends if the company shows profits. Preferred Stock usually comes with no voting rights, but promises set dividends regardless of whether or not the company shows any profits.
The rights, privileges and restrictions for different classes of stock can be determined by the Board of Directors in any way it sees fit.
Stock can further be divided into different series within a stock class. Thus, you could have Common Stock that is further divided into different series of Common Stock. In California, every series within a class must have the same rights and privileges.
Value of Shares of Stock
Shares of stock have value. In a private company (i.e a corporation that is not traded on a public stock market), you can set the value of these shares how you see fit. The value of the stock is set in your corporate bylaws. Each share could be worth $1, $10, $100, etc.
It is important to recognize that when your initial shareholders buy-into the corporation, they are exchanging assets for stock. Ideally, this exchange is a one-to-one ratio. In other words, Joe gives the corporation $10,000 in cash for $10,000 worth of stock.
A one-to-one exchange is not always possible. Property, for example, can be exchanged for stock, but the value of the property depreciates over time, fluctuates with markets, etc. Services and expertise can also be exchanged for stock. An initial shareholder may bring business management experience to the company that you feel is valued at $10,000 worth of stock.
Where corporations can get in trouble is in exchanging assets for stock that are clearly not of equal value. For example, if a shareholder offers property valued at $10,000 and is given in return stock valued at $100,000. These are clearly not comparable values.
A publicly-traded corporation is a company that has stock sold on a public exchange, such as the New York Stock Exchange (NYSE). “Going public” is a lengthy and expensive undertaking, generally taking at least a year of time and costing over a million dollars.
Very few companies are publicly-traded. Private companies are the norm.
Publicly-traded stock is not actually sold by the corporation itself. A corporation works with an investment bank and underwriters who actually purchase the stock from the corporation and then sell the stock on the market themselves. This is why the process of going public is long and difficult, because investment banks do not want to take on a bad or risky investment.
In the process of going public, you do not set the stock price yourself. You work with the investment banks and underwriters to find the best possible price for your Initial Public Offering (IPO).
Publicly traded corporations in California are required to file an annual Corporate Disclosure Statement.