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Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz. For more biz answers go to Coffee Talk Answers.
Featured Biz Question
I'm looking to incorporate my business, but there is one thing I don't understand: how do you put money
into the corporation?
I know that the idea is to purchase shares to put money into the business, but what do you do about
transferring equipment and supplies into the business? I understand the process of incorporating, but
I just don't get how you get control of your company, do you have to buy your own shares? Thanks for
the help, my face is red asking, but I just don't get it!
Answer from our Guest Expert Peter Hupalo of Hupalo Ltd.
Corporate Shares
This is a very good question! Issuing shares causes a great deal of confusion.
How to Issue Stock If You're the Only Investor
How you distribute shares in a corporation depends upon whether or not you have other people investing in your corporation. If you're the only investor, things are simplified a great deal.
When you incorporate, you typically purchase a set of corporate records, which includes stock certificates and a stock transfer ledger (a share register). Further, when you incorporated, your corporation was 'authorized' to 'issue' a given number of shares. If you're the only founder and investor, you typically put some money into the corporation and take some shares in exchange. That is, you issue some corporate shares to yourself. How much you pay for a share is pretty arbitrary as is the number of shares you receive.
Suppose, for example, that you plan to keep your corporation small. The corporation might only authorize 100 shares, which means that the corporation can only issue 100 shares without making some formal modifications to the corporate charter. Some business experts recommend 'authorizing' far more shares than you need to allow for growth and flexibility. However, if you know you'll be keeping your company small, you probably don't need a huge number of shares. Just because your corporation authorized a given number of shares doesn't mean you must issue that number of shares.
A person's percentage ownership of a company is determined by the percentage of total issued shares
that a person holds. So, let's assume you need $5,000 to start your company. You might issue yourself
five shares of corporate stock at $1,000 each. To do so, you'd look at your stock transfer ledger and
it's pretty self-explanatory. Columns list the name of the shareholder; the date shares are issued or
a transfer of ownership is made; the amount paid; and from whom the shares were transferred (which would
be listed as an 'original issue' if the shares are coming from the corporation).
You pay the money for the shares into the corporate account, typically with a personal check. Then you mark down the information in the share register.
Next, you actually issue the shares. This means you take a certificate of stock which typically reads
something like "This certifies that ____ is the owner of ____ fully paid and non-assessable shares
in the ___ corporation." And you fill in the blanks with the appropriate information. Then, typically,
a corporate officer signs the certificate, and it's stamped with the corporate seal.
You now are the owner of five shares of stock and are 100% owner of your corporation. Because the company
needed money and you were the only source of financing, it was easy—you exchange your cash for
stock.
Cash is the universally accepted way of purchasing stock in a corporation, and it's considered an acceptable means of getting ownership in a corporation in every state. The nice thing about cash-for-stock deals is the actual amount paid for the stock is clear.
Okay, but what about future shares? continued
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About the Expert
Peter Hupalo
Owner of HCM Publishing, Inc.
Peter investigates the latest computer-programming technologies and researches
companies for investment. He also writes a column about entrepreneurship
and small business for iSyndicate.com and reviews biz books. Peter wrote
Thinking Like An Entrepreneur, about how to make savvy business
decisions and take real control of your financial destiny. more