Common vs. Preferred Stock: Know the Difference as Business Owner

If you have set up a corporation, congratulations! One of the key steps now is to ensure that you acquire the proper capital. A popular way of acquiring capital is by issuing shares. However, different classes of shares can exist, and being uneducated on the type of shares to issue can be detrimental to the business. Therefore, you must remain educated in knowing the difference in share classes.

The most common type of share is appropriately named the common shares. Owners of common stock will most often retain voting rights over matters in regards to the corporation. However, owners of common stock will be paid second behind preferred shares, which will be discussed momentarily. Dividends paid to common stock can also vary, giving great incentive for investors to purchase common stock. The return on common stock can be said to be limitless, because the returns will only depend on just how successful the company is. During liquidation, the claims of owners of common stock will be subordinated to those claims of preferred stock owners. In sum, several incentives exist for investors to invest in common stock of your business, albeit a less-safe incentive.

Another type of share is known as the preferred stock. Preferred stock will get paid first relative to common stock. Holders of preferred stock will not receive voting rights over company affairs. Often times the dividends paid to preferred stock will be affixed either by percentage or by amount. Preferred stock is often the safer investment as it sees returns sooner. Additionally, upon liquidation, preferred stock is, appropriately, preferred in receiving dividends from the corporation.

While common and preferred are the two typical classes of stock, other classes of stock also exist. A corporation may, for example, issue participating stock. Holders of participating stock will be paid first and share in distribution. Another type of stock is cumulative stock, which entitles the right to dividends to be carried over. Holders of cumulative stock will be paid first and be paid for prior years not paid.

Decided what type of stock to issue as a corporation is a delicate process. The proper documentation must be filed to comply with legal requirements. Having the right legal team can ensure the proper documentation is prepared and filed to escape future legal issues. Call the Trembly Law Firm at (305) 431-5678 to schedule a consultation today.