Startup companies and small businesses that want to issue shares of stock have to incorporate as a C corporation, or C corp. Selling stocks lets companies quickly raise a potentially unlimited amount of funds to invest in new projects or company operations. The ability to issue a variety of stock is one of the main features of the C corp, which can offer many different ways to draw in new investors. Small businesses or startups that become C corps will encounter some drawbacks, though, including potential double taxation and loss of independence.
Advantages of Stocks
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By issuing stock, business owners can raise large sums of capital without being responsible for a monthly repayment, as they would be with a loan. Shareholders expect they will be paid back when the profits from the company result in dividend payments. Also, if the share price of the stock rises, shareholders can profit by selling the shares to another investor at a price that is higher than what they paid. Growing companies that issue stock can later use that stock for mergers or to acquire other companies.
Attracting Investors
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Selling stock can attract more investors because it offers oversight and part ownership of the company's operation, giving investors more security that they can recoup their investment. A limited liability company can't issue stock, and an S corp can offer only one class of stock, which means that the rights and responsibilities of each share is the same. However, a C corp can issue different classes of stock, offering many options for raising revenue and attracting investors.
Classes of Stock
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A C corp is the only kind of private corporation that can issue different shares of stock that give holders different rights and responsibility. The two main classes of stock are common stock, which gives shareholders a stake in the ownership of the company, and preferred stock, which gives shareholders a stake in the assets and potentially a dividend payment. Venture capitalists usually restrict investments to C corps that can issue preferred stock, because these shares give investors preference over common shareholders if the company is liquidated.
Articles of Incorporation
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C corps control the shares they issue through the articles of incorporation filed with the state. Startup companies often issue 20 million shares of common stock and 5 million shares of preferred stock, according to the QuickMBA website, but often the corporation will hold these shares until it needs to raise revenue. Some closely held companies that don't need outside investors can issue a small amount of common stock to consolidate control and avoid some state taxes. A C corp can amend its articles of incorporation to issue additional shares.
Drawbacks of Stocks
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Shareholders can have decision-making authority through the board of directors, which can cost a business owner a level of control over her company. Also, small C corps can have more difficulty securing a loan from a bank than can an LLC, sole proprietorship or partnership, because the owners of these last entities can put up personal collateral like a house or similar asset.
