When a corporation is formed, it often issues stocks and shares to investors. This gives shareholders the right to be part owners of the company. Understanding stock and shares is critical for anyone considering investing in a corporation, as well as for business owners and attorneys who are involved in setting up a corporation. Let’s take a look at some of the basics of corporate stocks and shares.
What Are Stocks and Shares?
Stocks are units of ownership that represent an investor’s proportional share of the corporation’s assets and profits. The more stocks you own, the greater your ownership stake in the company. Shares, on the other hand, are instruments that represent debt obligations owed by a company to its creditors or investors. Shares entitle holders to receive dividends when declared by the company's board of directors or payments upon dissolution or liquidation of the company.
Types of Stocks & Shares
The most common types of stocks are common stocks and preferred stocks. Common stock entitles holders to voting rights in the election of corporate directors and other matters put before shareholders for approval; preferred stock does not typically include voting rights but may entitle holders to certain preferential dividend payments or liquidation preferences over common stockholders. The most common type of share is an equity security which represents an ownership interest in a company; these securities can be listed on public exchanges such as NASDAQ or traded over-the-counter (OTC). Other types of shares include debt securities (such as bonds), hybrid securities (convertible bonds), warrants (options), derivatives (futures contracts) and mutual fund interests.
Rights & Obligations Attached To Stock & Share Ownership
In addition to owning a proportionate share of a company's assets, shareholders also have certain rights attached to their ownership interest including dividend entitlement, if applicable; access to financial information; pre-emption rights on new issues; right to vote on important matters such as mergers/acquisitions; inspection rights; right to participate in shareholder meetings; right to receive notice regarding proposed actions affecting their interests; priority over unsecured creditors upon dissolution/liquidation; transferability subject only to certain restrictions imposed by law or agreement between shareholders. On the other hand, shareholders may also be subject to certain obligations including payment for their shares when due; liability for unpaid taxes/debts incurred by the corporation prior to issuance/transferring their shares; providing personally identifiable information about themselves pursuant to anti-money laundering laws/regulations; compliance with fiduciary duties under applicable law if they serve as officers/directors of the company.
As you can see from this overview, understanding corporate stocks and shares is key for any business owner or attorney looking into forming a corporation. It is important that all stakeholders understand their rights and obligations under applicable laws so they can make informed decisions when engaging with corporations or investing in them. With this knowledge comes peace-of-mind knowing that everyone will get what they expect out of any transaction involving corporate stocks and shares.
For more information about corporations and stocks, or would like to set up your corporation, contact Curington Law, LLC at 312 803-1755 or online.
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