One of the most common ways to raise capital for your small business’s operations is to sell stock in your corporation. This allows you to raise funds for business expansion or to continue running your business if it’s struggling. Even if you are currently the sole owner of your business, you can sell shares to others, but you must be careful not to violate securities laws.
A corporation provides liability protection for its shareholders while also allowing them to exchange ownership interests by transferring shares. Unlike a sole proprietorship or partnership, corporations continue to exist even when shareholders change. To incorporate your business, you must file the proper registration paperwork with your state business registrar and follow state procedures for filing annual reports. While a corporation may have many shareholders, it is also possible to organize a corporation with just one shareholder who owns 100 percent of the shares of the corporation.
One of the advantages of incorporating your business instead of operating under some other business structure is that you are able to offer shares in your corporation to raise capital. When you sell stock, those who purchase it become shareholders in your business and actually own a percentage of the business respective to the amount of stock they purchase. For example, if you sell 20 shares to someone else and keep 80 for yourself, you then own only 80 percent of your company. You can also sell shares to transfer ownership of the business to someone else, perhaps as part of a gradual purchase agreement.
Even non-public corporations – those that do not sell stock on a stock exchange – can sell stock. You may wish to consult an attorney before selling stock, even privately, since securities laws carry stiff penalties for violations. Your stock sales must either be registered or qualify for an exemption from registration. Private sales may qualify for exemption under Section 4(2) of the Securities Act of 1933 which exempts transactions that do not involve a public offering. Courts use various factors to determine whether there has been a public offering, including the dollar amount of the offering, the financial sophistication and wealth of those who are offered the stock, and whether the investors have a pre-existing, substantive relationship with the company issuing the stocks. Thus, selling stock in your corporation to a close family member may qualify for this exemption.
There are other exemptions available for sales that do not qualify for the private sales exemption. For example, if your investors are “accredited,” meaning they qualify under Securities and Exchange Commission rules as suitable to undertake an investment, the sale may be exempt from registration. Exemptions are also available for sales based on certain dollar limits, geographic restrictions or limitations on the number of investors. If you decide to take your company public, be prepared for a time-consuming process. You must hire an investment bank to underwrite your initial public offering (IPO), deciding how much money to charge for the initial sales of your shares.