| The Articles of Incorporation must indicate the number of shares the corporation is authorized to issue. If the shares are to be issued in classes or series, the Articles must specify the preferences, rights and limitations of each class. A corporation should have enough shares that it can issue to the initial shareholders and have more shares remaining to issue to shareholders that may be added to the corporation at a later date. A corporation may issue up to the number of shares that are authorized in the Articles of Incorporation.
For instance, the corporation can be authorized to issue 100,000 shares, which means there are 100,000 shares available to the corporation to issue to shareholders and this number would appear in the Articles of Incorporation. If there are two initial shareholders and the corporation issues 10,000 shares to Shareholder A for one dollar per share and issues 20,0000 shares to Shareholder B for one dollar per share, the corporation has raised $30,000 in capital and has issued a total of 30,000 shares. The corporation has a balance of 70,000 shares remaining that it can issue at a later date to the same or different shareholders.
A corporation can have one class of common stock or it can have multiple classes of stock with different preferences, limitations or rights. If the corporation is issuing common stock, then the total number of authorized shares must by identified in the Articles of Incorporation. If the corporation wants to create multiple classes of shares, then the Articles of Incorporation must identify the classes of shares, the number of shares of each class and identify the various preferences, limitations and relative rights of each class that the corporation is authorized to issue.
If you plan on forming a corporation with multiple classes of stock, we recommend that your retain an attorney who has experience forming and advising corporations so you make sure and structure the corporation for your purposes from the beginning. While most businesses are cost-conscious as they set up their business, this is an area that is important to allocate resources for the best structuring. If the business needs to be restructured at a later date because it was not structured correctly in the beginning, it can be very expensive and have costly consequences, including tax related issues.
The board of directors generally determines the appropriate price for the shares and the shareholder may pay for the shares for any consideration the board deems appropriate, but the shareholder cannot pay for the shares with a promissory note or with an agreement to provide future services.