Steps to Issue Shares in a C Corporation
When a company is incorporated, it comes to life with a structure that divides its ownership into an arbitrary number of shares. This article provides a comprehensive guide on how to issue shares in a C corporation, including the legal and financial procedures involved. Understanding these steps is essential for any business looking to raise capital or expand its ownership base.
Understanding Share Ownership and Issuance
In a newly formed C corporation, the initial shares are issued to the founders, who typically purchase them at a very low price, such as $0.00001 per share. This ensures that founders have control over the company from the outset. As new investors come on board, the corporation issues additional shares and sells them at a 'real' price, such as $1 per share. The funds raised are used to grow the company.
For example, if the company issues 1,000 shares to an investor at $1 per share, the investor pays $1,000 into the company’s bank account. This process increases the number of outstanding shares and influences the ownership structure. As new shares are issued, the percentage of ownership held by the founders decreases, but the value of their shares increases.
Legal and Financial Considerations
Issuing corporate shares is a complex process that requires careful planning and compliance with legal and regulatory requirements. Here’s a step-by-step guide to help you navigate the process effectively:
1. Examine Your Certificate of Incorporation
The first step is to review your Certificate of Incorporation, which outlines the maximum number of shares that may be issued. For simplicity, we will assume that only one class of common shares has been authorized. A corporation must not issue more shares than are authorized by the Certificate of Incorporation.
2. Obtain Board Approval
The next step is for the board of directors to approve a resolution. This resolution should specify the number of shares to be issued, the intended recipients, and the amount of consideration to be paid for the shares. The resolution may be approved during a board meeting or by unanimous written consent. It's important to note that the validity of non-monetary consideration (such as future services) may depend on state law.
3. Arrange for Payment of Consideration
The shareholder, whether a founder or an investor, must provide or agree to provide the specified form of consideration to the corporation. If the consideration is monetary, the corporation must receive the funds and deposit them into its bank account. Once this is done, the process of issuing corporate shares can proceed.
4. Issue Corporate Shares
A corporate officer typically records the new shareholdings in the stock transfer ledger. If the corporation issues paper share certificates, these must be signed by the President and Secretary. It is essential to ensure that all formalities are followed correctly.
5. Provide State Notification (if applicable)
Depending on the state in which the corporation is incorporated, it may be necessary to provide notice of the share issuance to the state. For instance, in California, Section 25102(f) – Securities Law Compliance – outlines the requirements for filing such notices.
Key Takeaways
Issuing shares in a C corporation involves several key steps and considerations. Understanding and following these steps can help ensure that the process is legally and financially sound. It’s crucial to work closely with legal counsel to tailor the process to your specific situation.
For comprehensive legal advice and to ensure compliance with all applicable laws, consult with a licensed attorney in the appropriate jurisdiction.
References:
Quora blog on share issuance: How Do We Issue Corporate Shares California Corporate Code: Section 25102(f) – Securities Law ComplianceThis article does not create an attorney-client relationship nor is it a solicitation to offer legal advice. If you require specific guidance, please consult a licensed attorney in your jurisdiction.