The question was recently posed to me by a friend: Can I sell stock into my company as a sole-proprietor? Let me first answer in the short…No! Here’s why:
A sole-proprietor is only one person that owns a business. A stockholder owns a share of the company. In order to have stocks, you need to have your business set up as a corporation. One benefit of a corporation vs a sole-proprietorship or partnership is that your personal finances and that of the company are completely separate. Owners of a sole-proprietorship file a Schedule C with their personal taxes to show their business income and expenses. They also have to pay self-employment tax. As a partnership, the profit/loss is passed on to the owners and are subject to self-employment tax. In a corporation, salaries are taxed. Of course, there are always pros and cons to each kind of business: sole-proprietor, partner and corporation.
Corporations issue stocks/shares within the company. This helps the business to raise funds. Corporations can have as few as two stockholders up to as many as they wish. The more stocks, the more complicated it can be. When it’s a large corporation (meaning lots of stockholders), there is a need for a CEO and board of directors. Each stock/share entitles the holder to their portion of the company earnings.
There are many kinds of stocks. A Common Stock is where one stock equals the next. So if, for example, a company has 10 stockholders and the total value is $1,000. Then each stockholder has $100 of dividends. Not only are the shares equally valued, but each stockholder has equal voting rights.
Preferred Stocks are a special type of stock. As defined by Investopedia.com, “a preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends of common shareholders, and shares usually do not carry voting rights.”
Treasury Stock is another kind of share. This is stock that’s not an asset nor does it carry voting rights. A company can buy back the treasury stocks from the stockholders. When a company has Treasury Stock it doesn’t own itself. Some companies use these as a way of issuing a bonus to an employee. Shareholders benefit from a company owning Treasury Shares since there aren’t as many shares, thus increasing the value of the common and preferred shares.
There are other kinds of stocks, but I won’t go on about them.
One question that might be raise is, how do I convert from a sole-proprietor or partner to a corporation? You will want to check with a local lawyer to ensure you are doing everything necessary for your city and state. You will also need to file either a Form 2553 or Form 8832 with the IRS. But, again, I want to emphasize the need to speak with a local lawyer and/or accountant to ensure that you are doing everything that needs to be done for where you live.