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Many times a corporation will seek an investor but before it actually consummates that transaction, it increases the number of shares it has available to issue to investors. It is not uncommon for a corporation to recapitalize itself with 10 million shares. The proper way to consider this is to place a value on your company which includes your expectations of its profits, your ideas and the influence that you are exerting in making your company a success. Let’s say as a result of this, you value your company at $500,000. You then go out and recapitalize the company with 10 million shares. That would mean each share in the stock in the corporation has a market value of 5 cents then you would bring investors in at that rate and issue them shares. If a person was investing $10,000 in your corporation, they would receive 200,000 shares. However, during the re-capitalization process and before any shares are issued to an investor, you would want your corporation to issue you a stock dividend for as much as 60% or 70% of the shares of the corporation to yourself. This is a non-taxable transaction and protects you from losing your majority control of the corporation. So when we talk about recapitalization, we are also talking about a stock dividend.

Desired number of shares for the corporation to be recapitalized at:

Generally corporations have one class of stock. But they may have different classes of stock. Please bear in mind, however, that a Sub Chapter S Corporation may only have one class of stock. However, having common voting and common non-voting stock are not considered two classes. Other classes of stock which you might consider having for a regular corporation are preferred stock and convertible preferred stock.

I have questions on recapitalization, stock dividends or adding an additional class of stock to my corporation. Please have an attorney call me to discuss these topics.

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