Shares and Shareholders
There are a variety of ways that companies can be structured. Generally, however, companies do one of two things: They either distribute shares to shareholders, or bypass shareholders’ rights and remain their own privately-owned companies. A company chooses which of the two options they take depending on the company’s overall aims.
If a company distributes its shares to shareholders, those shareholders own a fraction of the company’s stock. In return for agreeing to buy and hold the company’s stock, shareholders benefit from dividends and voting rights. Depending on the company, dividends can be in the form of cash, stock or a portion of the company’s profits. A shareholder’s voting rights depend on the number of shares the shareholders owns. Generally, the more shares, the more your voting rights.
By holding company stock, shareholders essentially become investors who, over time, hope to reap rewards from their investment. As a part of investors’ compensation for investing in a company, their dividends are typically paid quarterly. At the same time, holders of more shares have greater responsibility and input in deciding the company’s direction — as well as reaping greater rewards if the company’s stock value rises.
Shares can be principal shares, preferred shares, or a combination of both. Principal shares generally come with all of the general rights and authority of company ownership, while preferred shares generally provide the holder with some rights, such as higher dividend payments, but fewer options to influence company decisions. In addition, a company’s particular type of securities may carry certain other rights not available to shareholders of other companies.
Due to the additional rights afforded to preferred shareholders, and the greater risk associated with principal shares, shares of the same company can have substantially different current market values depending on what type of stock the shares are. Shares are generally bought and sold in the open market, with each share typically being worth one vote.
Sometimes, companies issue additional shares through public offerings. When a company does this, the company sells a portion or all of its outstanding shares to the public. This is typically done to raise additional capital for the company.
The sale of equity securities helps companies to raise capital for operating expenses, capital expenditure, debt repayment, and mergers and acquisitions. Part of the proceeds are then used to pay existing shareholders a dividend — as either cash or in the form of additional shares. This helps to enhance the company’s value and, not uncommonly, its stock’s price.
When a company stays privately owned, shareholders are not issued stock. Instead, owners of the company typically share responsibilities among members and take payment in the form of salaries, benefits and other compensations.
A privately-owned company is usually owned by a small group of individuals and functions more like a partnership than a limited liability corporation (LLC). This lack of public supervision gives private companies less difficulty raising capital and greater freedom of operation. In some cases, a private company may eventually convert to a LLC by offering shares in public markets.
When it comes to private or publicly issuing stock, the decision is a difficult one and depends largely on the company’s specific needs. Whichever option is chosen, it’s important to research the applicable taxes, accounting processes, and what’s best for shareholder rights. No two companies are the same in this regard, so it’s important to understand the different ways to issue shares and what benefits each structure would present.
