Corporate stock represents the money or property that is invested in a corporation. It is a representation of the share of ownership in a corporate business. When a corporation files its Articles of Incorporation with the state, it states how many shares of stock it will be authorized to issue (for example, 500 shares).
When the authorized shares are sold or transferred to a shareholder for something of value (money, property, or labor), the shares are said to be “issued and outstanding.” All of the authorized shares need not be issued. The ownership of the shares in the corporation is then evidenced by a stock certificate describing the number of shares owned. The value of the shares can be a specific “par” value (for example, $1.00 per share) or they can be “no-par” value, which allows the board of directors to fix the value of the shares by resolution. If the shares are given a par value, the stock must be sold for at least the stated par value. The concept of par value is gradually being eliminated from modern business corporation acts, allowing board of directors discretion to fix the value of the shares. All states allow the use of no-par stock.
An example may best illustrate the use of stock: A corporation is formed and 500 shares of no-par value common stock are authorized in the Articles of Incorporation. Three people will form the initial shareholders of the corporation, with one desiring to own 50 percent of the shares and the other two desiring to own 25 percent each. All three comprise the board of directors. As a board, they decide to issue 300 shares of stock and they decide to fix the value per share at $10.00. Thus, the majority owner will pay the corporation $1,500.00 ($10.00 x 150 shares, or 50 percent of the issued and outstanding shares, not 50 percent of the authorized shares). The other two shareholders will pay $750.00 each for 75 shares apiece of the issued shares. The ownership of the shares that have been issued will be represented by stock certificates that will be delivered to each of the owners. The transactions will be recorded in the corporation’s stock transfer book. At the close of these transactions, the corporation will have three shareholders: one with 150 shares of issued and outstanding stock and two with 75 shares each of issued and outstanding stock. The corporation will have $3,000.00 of paid-in capital. Two hundred shares will remain as authorized, but not issued or outstanding. At shareholder meetings, each share of issued and outstanding stock will represent one vote.
The above scenario presents stock ownership at its most basic. The shares described were no-par value common stock. There are many, many variable characteristics that can be given to stock. The forms in this book are based on basic single-class common stock with voting rights. Classes of stock may, however, be created with non-voting attributes, with preferences for dividends, and with many other different characteristics. Most small business corporations can operate efficiently with a single class of com¬mon stock with voting rights. There is no requirement that the stock certificate be in a particular format. The stock certificate for use on this site is a simple generic form. If you desire, you may obtain fancy blank stock certificates from most office supply stores, but these are not required. For the issuance of stock, follow the steps shown below in the Corporate Stock Checklist. Each of the steps taken at a meeting of the board of directors must be documented with a board resolution. Also included in this chapter is a page for use in the stock transfer book, which should be included in your basic corporate record book.
Corporate Stock Checklist:
- Designate the number of authorized shares in the Articles of Incorporation and whether they are par or no-par value
- At the initial board of directors meeting, determine the number of shares to be issued
- If the shares are no-par, determine the value of the shares at the initial board of directors meeting
- At a board of directors meeting, determine who will purchase shares and how many will be sold to each person
- If necessary, at a board of directors meeting, the board of directors must fix the value of any property that will be accepted in exchange for shares of stock
- At a board of directors meeting, authorize officers to issue shares to persons designated
- The secretary will then prepare the appropriate stock certificates
- If there are restrictions on the transfer of stock, note the restrictions on the back of the certificate
- All of the officers of the corporation will sign the certificates
- The secretary will receive the money or property from the purchasers and deposit any funds in the corporate bank account
- The secretary will issue the certificates and receipts for money or property and record the transaction in the corporate stock transfer book
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