One benefit of incorporating your business is the ease with which you can raise additional capital by selling stock. Public companies are subject to governmental regulations that govern initial public offerings (IPOs) on a stock exchange. Selling stock in a private company is less complicated.However, there are legal implications that you should be aware of before selling the shares.
Public Companies Subject to SEC Regulations
If your company has grown rapidly and needs a substantial amount of capital to thrive, it may be time to plan for an IPO and take your company public. Bear in mind, however, that the U.S. Securities and Exchange Commission (SEC) will impose a complex registration process on your company before the IPO. Registration includes disclosure of information about the company&'s management team, details about the stock being offered, and submission of audited financial statements.
Shares in a Private Company
Small business owners rarely take a company public. However, you can still raise additional money for your company by finding private investors in a private offering of stock. Regardless of whether the investor is a friend or family member who wants to get involved in your business or a venture capital firm that sees potential in your business, the process is always the same. The investor will transfer money or other property into the corporation and, in exchange, the investor receives shares of stock that represent an ownership interest.
Percentage of Ownership Represented by Each Share
All shares of stock aren&'t the same. Stock value depends on the percentage of ownership that each share represents. For example, if you own all 100 shares in the company, each share represents a 1 percent ownership interest. Therefore, if your goal is to retain control over the company, you need to ensure that the shares you own always account for more than half of all outstanding shares.
Legal Documents Necessary to Transfer Stock
Since private company stock isn&'t held in brokerage accounts, the stock sale must be documented in a legally enforceable writing. The document can be a stock certificate, stock transfer form, or any other binding contract that outlines the number of shares you&'re selling, who is the new owner of those shares, and other information that&'s relevant to the stock and the corporation.
A Business Lawyer Can Help
The law surrounding selling shares in a company to raise capital is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.