The ownership interests that an entrepreneur sells to investors can vary depending on the type of business entity created by the entrepreneur, and the desires of the entrepreneur and investor. Many different ownership interest options are available, so ultimately the type chosen is the type the entrepreneur believes will be enough to entice investors.
The simplest and most straight forward type of ownership interest than entrepreneur can offer is a partnership interest. A partner is an undivided partial owner of the business, which means the investor owns a certain percentage of the entire company. The terms and conditions of the partnership interests will be outlined in a partnership agreement. Common terms in a partnership agreement include required capital contributions and how and when each partner can withdraw revenues from the partnership.
An entrepreneur that organizes a limited liability company will sell membership interests to investor. Each member of the limited liability company is a member of the company. A membership interest can be similar to a partnership interest, or it can be more similar to a stockholder's interest, depending on the way the entrepreneur sets up the LLC's operating agreement. Like a partnership agreement, the LLC operating agreement includes the terms and conditions of membership interests in the company. A member of an LLC will receive a membership certificate in the company.
If an entrepreneur sets up a business as a corporation, whether a C-Corporation or an S-Corporation, the entrepreneur will sell ownership interests in the form of stocks. Each stockholder is an undivided partial owner of the corporation. Stocks, in turn, come in different types, and each type of stock has advantages and disadvantages compared to other types of stock. Common stock is an ownership interest that includes a voting right in the affairs of the company. Common stock may also give the investor the right to receive dividends from the company, but generally common stock does not carry any guarantee of dividend payments. All dividend payments to common stockholders are subject to the discretion of the corporation's board of directors.
An entrepreneur can also offer preferred stock in a corporation. Unlike common stock, preferred stock does not give the owner the right to vote at stockholder meetings. However, preferred stock gives the stockholder a dividend payment each quarter or year. Preferred stock, like common stock, can come in different classes. For example, an entrepreneur may sell Class A and Class B stock. Class A stock may give the stockholder the right to, say, five votes per share, while Class B may give the stockholder only one vote per share. Stock classes allow the entrepreneur to customize the rights of various stockholders, whether preferred or common.
- "Legal Guide for Starting & Running a Small Business"; Fred Steingold; 2011
- Digital Vision./Digital Vision/Getty Images