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Selling Stock and Corporate Governance

Select Your Business Structure

A general corporation, also known as a "C" corporation, is the most common corporate structure. It may have an unlimited number of stockholders. (The number of people you can sell stock to is limited by state law and SEC regulations.)

A "close" corporation is appropriate only for the individual starting a company alone or with a small number of people, or if the corporation wants to restrict stockholders to family members or for a similar purpose. A "Close" corporation is also a Subchapter S corporation. Florida and other states have specific statutes for a "Close" corporation and have requirements that must be included in the articles of incorporation. A "Close" corporation must have qualifications for the stockholders, such as a member of the family. The stock is usually quite restricted. A "Close" corporation can be operated directly by the stockholders without a Board of Directors. Often the shareholders are also the employees of the corporation.

A "S" corporation is not a different type of corporation under Florida law. Subchapter S is not a different form of incorporation; it is an election made by filing form 2553 with the Internal Revenue Service. States may also have limitations on a S corporation. Florida S Corporations can have no more than 75 stockholders, can have no U.S. non-resident stockholders and it is not allowed to own or manage more than 80 percent of another corporation's shares.

Another restriction is that the "S" corporation can only have one class of stock. At first glance, this may not seem important, but it can be. For instance, the big advantage of a "C" corporation is if you are raising money for a corporation and want to maintain control of it without investing the major share of the capital, the only way to do it is to have common and preferred shares. The Board of Directors could also later create different classes of stock for specific purposes.

Only common shares usually carry voting rights. Thus, the founder could have 52 percent or 55 percent of the common stock, but have a far smaller percentage of the overall ownership of the total outstanding shares. The other shareholders would have many more shares of preferred stock than common stock. There is also the possibility that you might want to raise money in the future without diluting the Class A common shares by issuing a different class of common stock to raise money. You can always change from a "S" corporation to a "C" corporation. Consider all aspects before electing to be a "S" corporation.

The single big advantage of a Subchapter S corporation is that it is not taxed separately from its stockholders. Income is taxed only to the individuals who receive it. A "C" corporation pays income taxes on its income. When that income is distributed as dividends to its stockholders, the stockholders than pay personal income tax on that income. If the major stockholders are also paid as employees, that tax issue usually is not much of a problem.

There is no difference in the incorporation between a "S" and "C" corporation. The Secretary of State could care less. This is an election the corporation would make after it is formed by filing Form 2553 with the Internal Revenue Service (IRS).

There are also hybrid forms like a PSC, or Professional Service Corporation. These types of forms are outside of this discussion.

An LLC is not a corporation, but it offers many of the same advantages, combining the limited liability protection of a corporation with the "pass through"" taxation of a sole proprietorship or partnership. However, there are major differences. A LLC does not issue shares of stock, it has an operating agreement similar to what a partnership would have. Before you get involved in a LLC make sure your rights are protected in the operating agreement.

Another consideration is that LLC law is fairly new and is not as well settled as law for corporations. In Florida, a single member LLC does not provide much protection against creditors after a recent Florida Supreme Court decision.

Even if you do not want to operate an actual business, incorporation is something to consider for other purposes. There is even a seminar sold in television commercials aimed at the benefits of incorporation called the "Ray Reynolds Plan for Success". (I have no personal experience with this system and can not recommend it.) A corporation is a legal entity, it is a person in the eyes of the law. Thus, a corporation, for instance, can build its own line of credit separate from your own. A corporation can do the same legal acts an individual can do. One example, which California does not like, are people there who form corporations in Montana and use the corporation there to purchase their motor home/RV, thus escaping the high taxes on these vehicles in California. Personally I have always thought it was a good idea to own vehicles in the name of a corporation.

Taxi cab companies are known to form a corporation for each and every taxi cab in the fleet. In the event of an accident with a high damage award, only the single taxi is liable. A cab is generally driven by 3 different people and generates significant income so the costs of doing this are not a burden.

Select Your Management Team

Naming initial directors for your corporation is straightforward. Directors are typically the key players or owners in the business. In most states, only one director is required and you may simply name yourself. In an LLC, managers or members are selected.

If your corporation will have a number of stockholders, then the stockholders will elect the board of directors. The board of directors will then elect the chairman and the officers of the corporation.

Even if you are the only director rules of corporate governance must still be followed. Proper bylaws, corporate minutes and other recordkeeping is required. Failure to properly operate the corporation can result in the corporate veil being pierced in a civil action and you may be found personally liable for the corporation's debts. Failure to file annual reports and other requirements of the state can result in the corporation being administratively dissolved. Should you continue to operate the business after that, you may be held personally liable for debts and other obligations.

Select Your Number of Stock Shares
and Par Value

Stock represents ownership in a corporation. Par value is the minimum selling price for each share of stock. Often the stock will have a par value of a penny or a fraction of a penny. This allows the founders to purchase large blocks of stock for little money. When stock has a par value, the amount paid in must be adequate to support the par value. Later on the corporation will sell stock based on its book value or based upon a different valuation.

LLC's do not issue stock, so LLC ownership is like a partnership and has an operating agreement. The operating agreement must spell out everyone's rights and how decisions will be made.

A number of states, including Florida, do not require that par value be given. Some states have different incorporation fees based on the number or value of shares to be issued. This does not apply to Florida.

Whatever you do, do not split corporate stock 50/50 between founders. This will lead to an impasse, and can end up in court with the corporation being dissolved and liquidated. Fifty-two percent of the common stock is considered control, but it is not total control. For complete control, one party must own fifty-five percent of the common stock with voting rights. Be sure you have a good understanding of your duties to minority stockholders and what they can do if you, the person with control, is not fair. Remember that your fuduicary duties are to the corporation and all the stockholders. Don't allow personal interest to blind you to your duties just because you own control. Many states have minority stockholder oppression statutues, though Florida does not. It takes fraud or a stalemate in decision making to force the involuntary dissolution of a Florida corporation.

Another method for control is to have another stockholder, such as a relative or friend who wants to be a silent owner, to provide you with a "Power of Attorney" to be able to vote their shares.

In theory, even a stockholder with one share could ask a court to dissolve a corporation. This would not make economic sense, but people do many things in a dispute that do not make economic sense. I strongly recommend that the corporate Bylaws include a clause that no single stockholder can dissolve the corporation. Admittedly, one of the advantages of incorporating in Delaware is that Delaware law does not allow any stockholder to get a corporation dissolved. A Delaware incorporation is not practical for most small businesses that are located outside of that state. Traditionally, Florida Courts follow Delaware corporation law court decisions.

In an LLC the operating agreement must provide a means of resolving disputes, or the courts will end up doing it for you. LLC operating agreements often call for binding arbitration by an independent mediator. This is usually much cheaper than going to court. If you get involved in an LLC without a well written operating/membership agreement the outcome is usually a disaster. This is a constant theme in legal forums I contribute to.

The re-sale of stock in your corporation, or the transfer of shares can be controlled with stock restrictions in the Bylaws, such as RFR, or "Right of First Refusal." In a close corporation everyone will likely know of these restrictions, but in other cases and in order to be safe from a later "gotcha" in court, be sure to print these restrictions on the stock certificate. Blue Planet prints them on the back of the certificate and we are the only corporation kit company providing a selection of transfer restrictions printed on your stock certificates. We do strongly recommend you discuss any transfer restrictions with a qualified business attorney. If stock is too restricted, those restrictions could be overturned in court by an unhappy stockholder.

You are permitted to sell stock to individuals and others. There are restrictions. You are not allowed to advertise the sale of shares. Basicly you must have a pre-existing relationship with the person. A significant exemption to this rule are institutional and professional investors. See SEC and state investment regulations for the definition of these types of investors.

There are two approaches to selling stock. One, you can create a business plan and include a stock subscription. People interested in investing will sign the stock subscription which is a binding contract. There are limitations and requirements. The major limitation is that the corporation will not be formed until subscriptions total the investment the business plan calls for.

The second approach is to incorporate first and then sell stock. This approach lets you get off the ground right away, so to speak, though the company will probably be dependent upon your own money until you sell stock to others. This approach creates a greater risk for your investors as they do not know if you will really have enough money to operate the business successfully.

Although it is possible that officers are held liable should the corporate veil be pierced by fraud or serious malfeasence, stockholders are never held liable for the acts or debts of a corporation. At worst they can lose their investment if the corporation goes bankrupt.

Purchase Stock Certificates Here

Blue Planet Offices manufactures its own stock certificates and we custom print them for you at the price of fill-in-the-blank certificates from the other guys. We own a printing plant with many capabilities. We offer professionally engraved certificates printed on a press with real ink.

You get to pick the border and features you want, the artwork you like (either stock images or your own logo, in a choice of colors, including bright red, medium blue or hunter green. Other colors will be available shortly. Pick your type style and select the wording, and we custom produce 20 or more stock certificates just for you. Have professional stock without the professional prices.

Click BUY STOCK CERTIFICATES to learn more and place your order.

The information contained in this web site is provided to you "AS IS", does not constitute legal advice, is governed by our Terms and Conditions Of Use, and we are not acting as your attorney. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained in or linked to this web site and its associated sites.

The law changes very rapidly and, accordingly, we do not guarantee that any information on this web site or our affiliated web sites are accurate and up to date. Additionally, the law differs from jurisdiction to jurisdiction, and is subject to interpretation of courts located in each county. Legal advice must be tailored to the specific circumstances of each case and the tools and information provided to you may not be an appropriate fit in your case. Nothing that you read or is provided on this web site should be used as a substitute for the advice of competent legal counsel.

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