A corporation is a business entity that is owned by shareholders. Each share represents a percentage ownership in the business. Becoming an owner in a corporation simply requires a person to legally acquire shares of that business’s stock. However, the process for acquiring stock varies depending on the type of corporation. Therefore, prior to investing in a corporation, you should investigate its type and any associated restrictions that go along with shareholder restrictions.
A public corporation is one that has stock that is traded in an open market. An open market could be a stock exchange or an over-the-counter market. Just because the stock is traded publicly does not mean that you can buy the stock outright on your own. In the U.S., only specific licensed individuals or organizations, known as broker-dealers, can purchase publicly traded stock. Research possible broker-dealers and make sure that they are properly registered with the U.S. Securities and Exchange Commission. In addition, review what fees each institution charges and what additional services they provide. Once you have chosen a broker-dealer, set up an account with that institution. Comply with all requirements established by the organization. Once the accounting is established, instruct the broker-dealer to purchase stock in the corporation. Ensure that the broker-dealer provides you with documentation showing when you bought the stock, how much you acquired, and the acquisition price.
A private corporation is one that is not publicly traded. Since the shares are not available to the public, acquiring stock may be difficult. Contact the corporation or a related party and inquire about the process for acquiring shares. Some private corporations have shareholders' agreements that restrict who can buy stock. These agreements may require all stock sales get approved by shareholders or the board of directors. If you can acquire shares, establish a price. Determining the price can be difficult due to lack of an established market. Consider using an appraiser or the prices of a publicly traded company in a similar industry to help you set the stock price. Once you have determined the price, provide the seller with cash or property equal to the value of the stock you wish to acquire. Obtain either share certificates or a stock purchase agreement as documentary evidence of the transaction. Ensure that the private corporation records the results of their transaction in their corporate records.
A close corporation is a type of private corporation with additional regulations regarding ownership. The benefit of a close corporation is that it is managed with fewer formalities, such as regulated meetings of the board of directors. Review the regulations of the state where the business is incorporated and determine if the corporation can add you as a shareholder without violating its ownership restrictions. If you can be added, the process for purchasing shares is the same as in a private corporation.
Establish your basis in the stock — how much you paid to acquire it. Basis is required for tax purposes, as it is used to determine taxable gain or loss when you sell the corporate stock.
References & Resources
- Legal Information Institute: Corporations: An Overview
- Free Dictionary: Publicly Traded Company
- U.S. Securities and Exchange Commission: Guide to Broker-Dealer Registration
- Business Dictionary: Private Corporation
- Fordham Law Review: Drafting a Shareholders’ Agreement for a New York Close Corporation
- Free Dictionary: Close Corporation
- Internal Revenue Service: Topic 703 – Basis of Assets
- Internal Revenue Service: Topic 409 – Capital Gains and Losses