One of the benefits of the corporation entity type is the way it is capitalized. The ownership of a corporation is represented by holding shares of stock. Selling stock in exchange for an ownership position is one of the ways a corporation raises money to operate. A corporation's ability to sell stock is a key feature of the entity type and is specifically authorized by law.
A corporation is formed under the law of the state that the owners choose as the corporation's home of record. Each state has an enabling statute, typically called a Corporations Act, that controls the formation, registration and operation of corporations in the state. Although the law in each state is particular to that jurisdiction, there are certain basic features and powers that all corporations have and that are intrinsic to the entity type. One of the features is that ownership is represented by holding shares of stock in the company. One of the powers is that corporations have the right to sell stock in exchange for ownership in the company at the corporation's discretion.
Corporations can be owned by a single person or hundreds of thousands of persons. When a corporation is initially formed, the incorporator indicates the number of authorized shares of stock the company is allowed to issue in its articles of incorporation. In a corporation with only one owner, 100 percent of the outstanding shares are held by the sole owner. He capitalizes the corporation, contributing money, property or services to it, in exchange for the shares. Once the sole owner has possession of the shares, he has the power under the state Corporation Act to sell some or all of those shares to raise additional money. He can even authorize additional shares if the original issuance under the articles is insufficient.
Private Versus Public Sales
Although a corporation and its owners can sell stock to raise additional money or to bring on new owners, there are restrictions. Sale of stock to the public over a stock exchange is regulated by state and federal law. A corporation that wants to sell stock to the public at large must register as a public corporation and issue an initial public offering. A public corporation must also comply with financial regulations enforced by the U.S. Securities and Exchange Commission. A corporation, however, can sell stock to private parties without the hassle of registration. A sole owner can sell shares to friends, family and investors at his discretion.
A sole owner of a corporation should keep in mind that selling shares of stock in the company dilutes his equity position. The percentage of stock owned by outside parties lessens his own ownership percentage, since the total percentage must equal 100 percent. A corporation operates by vote of the shareholders. Unless an owner retains a majority of the outstanding shares, he is at risk of losing control of his company.
- Citizen Media Law Project: Corporation
- FindLaw: Writing and Filing the Articles of Incorporation
- FindLaw: What Actions Can a Corporation Take Under the Law?
- Small Business Advocate; Capitalizing Your Company; Jim Blasingame; April 2003
- Inc.; A Primer on Equity Dilution; Michael Lechter; January 2008
- American Bar Association; Revised Model Business Corporations Act; 2005