Law Offices of Jeff Smith

Some Basic Terms of Corporate Ownership

A company can do business in numerous forms, including a sole proprietorship, a partnership, a limited liability company, and a corporation. A corporation is a legal fiction sanctioned by the state. The concept is designed to promote the formation of businesses by shielding owners from personal liability for the acts of the company;  this shield in theory makes investors more willing to sink their capital into the venture. Simplified, ownership is separated from management throught the concepts of shareholding and an intermediate layer of responsibility.  Ownership resides in shareholders, who in turn elect a board of directors. The board of directors appoints officers who then run the company.

The term "stock" once meant the supplies or stores of a company and is used in various senses in corporate law today. "Stock" has been held to embrace not only capital stock of a corporation but all corporate wealth and resources, subject to all corporate liabilities and obligations. It may mean the capital or principal fund of a corporation or company, formed by the contributions of subscribers or the sale of shares; the aggregate of shares owned by the stockholders of the corporation; or the proportional share of an individual stockholder. In a broader sense, stock is a right: that of the shareholder to participate in management of the company and to share proportionally in its net profits or earnings, or in the distribution of assets on dissolution.

A "share" is a proportional part of corporate stock, carrying with it certain rights in a corporation in proportion to the size of the share.

A "class" of shares is a group of shares having identical characteristics. Typically, classes are termed "common" or "preferred" or are given a special designation. In an "S" corporation, there may only be one class of shares: all stock is common stock.

"Common" shares are shares which have no preference over any other shares with respect to the payment of dividends or the distribution of assets on liquidation. The holders of common shares are entitled to dividends (to the extent declared by the Board of Directors) or to distribution of assets on a pro rata basis.

The share "certificate" is the physical instrument issued by a corporation certifying that the person therein named is entitled to a certain number of shares; it is prima facie evidence of title to a share.

"Par value" is a price term for a class of shares. In the case of a common share, par means a dollar amount assigned (arbitrarily or otherwise) to a share by the company's charter, the Articles of Incorporation. Par value may also be used to compute the dollar amount of the common shares on the balance sheet. Par value has little to do with market value of common stock. Generally, shares may not be issued for an amount less than their par value, i.e., par establishes the minimum sales price for which shares may be issued by the corporation. However, many companies today issue no-par stock, stating instead a "per share" value on the balance sheet.

Illinois law does not require a corporation to use par values. Instead, it may be stated that the shares will have "no par value" (NPV).

The number of "authorized shares" means the number of shares within each class which your corporation will have the power to issue. This number remains the same unless and until increased or reduced by amendment. Your corporation is not required to issue all of its authorized shares, but some must be issued. The Business Corporation Act of 1983 sets no minimum requirements or maximum limits on the number of authorized shares. In choosing the number of shares to authorize, you should consider not only your immediate needs but also how many shares your corporation may want to issue sometime in the foreseeable future.

Jeff Smith for years has helped entrepreneurs and business ventures start up;  many have grown to become much larger and more successful. We can advise you on the various options for forming a business and guide you through the formalities needed to maximize the benefits of the form you choose.

© 1995 Jeffrey P. Smith

The above is not intended as a substitute for full legal advice, but only as general information. For legal advice, consult an attorney.

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