Small businesses typically start as sole proprietorships. Some sole proprietorships incorporate to reap the benefits corporations provide, including expanded tax deductions and personal liability protection. In addition, when sole proprietors decide to seek investors to grow the business, they often incorporate to sell stock in their companies. All states allow one person to create a corporation, and all corporations, regardless of the original number of owners, can sell shares.
Setting up a corporation is straightforward. To form a corporation you must file articles of incorporation with the secretary of state in the state your company will conduct most of its business. For most business owners, that is their home state. You do not need to be a resident of the state, but you must have a registered agent in that state who will ensure that you receive any communications from the state.
All states allow one shareholder corporations and most allow the lone shareholder to serve in several board positions. For example, corporate filing documents ask you to name the president, treasurer and secretary. As a sole shareholder in these states, you can provide your name for each position. In other states, you will need to specify at least one other person in a board position.
Shares at Incorporation
Part of the process of establishing a corporation requires you to issue shares, or stock certificates, to owners. In the documentation filed with the secretary of state, you must specify the number of shares your corporation issued and your name as the founding shareholder. You must also typically provide the stock's par value, or face value.
Operating as a corporation allows your business to raise capital to finance start-up and growth expenses by selling shares. Selling shares to family and friends might be straightforward, but selling shares to outside investors can be complicated. However, the existence of federal laws and expansive case law on raising capital means that many prospective investors and the attorneys who help them understand the process. The ability to raise equity capital by selling stock in your company applies no matter how many founding shareholders exist. When your sole-owner corporation sells shares to family and friends or investors, it becomes a multiple-owner corporation.
When you are the sole owner of a corporation, you own and control 100 percent of the company. When you sell stock, you sell an ownership stake. If maintaining majority ownership is important to you, do not sell off more than a 49 percent stake in your company. If maintaining control is more important to you, you can create two classes of stock in which one class has more voting rights. Therefore, even if you sold a majority of the common stock in your company, you would still retain voting control of the company. An attorney can assist you with this structure.
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