One way to raise capital for your business is to issue stock. There are many advantages to doing so, but also some drawbacks that are worth remembering. Because of those drawbacks, there are a few items to keep in mind whenissuing stock.
Reasons to Issue Stock
Issuing stock can be beneficial for your business in the following ways:
Avoid The Liabilities Of Debt
The alternative to raising capital with stock is to go into debt. Often, this brings several drawbacks, including:
- High interest (especially for new businesses or those with low credit)
- Obligation to divert revenue toward loan payments
- Makes your business look riskier to investors
By issuing shares of stock, you’re able to avoid those liabilities.
Liquidity
In addition, selling shares of your company essentially converts it into a highly liquid asset that can be easily traded. If a founding member or an investor wants to sell their portion of the company for profit, it’s much easier for them to do so.
Attract Investors
Issuing stock is a great way to attract investors, as opposed to funding your company with debt, which could turn investors away. Investors typically compare the proportion of your company owned by shareholders to the amount owned by lenders. The more that’s owned by investors, the less risky your company is presumed to be.
Drawbacks to Selling Stock
Of course, issuing stock for your business does come with its drawbacks as well. These are well worth considering before you start looking for investors.
Diluted Ownership
When you issue stock, you’re selling portions of ownership over your company. That means you are considered to own less of your company, a principle called “diluting ownership.” As such, you’ll need to share profits and growth with your shareholders.
Less Control
Diluting ownership over your company may also reduce the control you have over it as a whole. Common stocks grant shareholders voting rights in your company, so you may find yourself with much less say over the decisions made in your company or the direction it takes in the future.
Legal Risks
Finally, there are many federal and state laws governing the issuing of stock, and it will be important to keep in line with those rules as you go aboutselling shares. An exact process needs to be followed, and you’ll likely need some legal guidance to do everything by the book. Otherwise, you potentially expose yourself to hefty fines.
Tips to Remember When Issuing Stock
When issuing stock, keep these items in mind:
- Price shares in a way that will give you flexibility while still covering expenses.
- Follow your Articles of Incorporation when determining how much stock you can issue.
- Always get approval from your company’s board in writing.
- Document everything.
- Keep in compliance with state and federal securities law.
Throughout the process, legal assistance is an absolute necessity, from making decisions on how to value your stock to drafting agreements and documents. Above all, it’s critical to keep in line with the complex regulations governing stocks and securities. As such, you’ll need an attorney to advise you on every step you take in this area.
FAQs
Advantages & Disadvantages of Issuing Stock or Long-Term Debt
- Advantage of Selling Stock: Cash to Grow Your Business. ...
- Disadvantage of Selling Stock: Giving Away Ownership. ...
- Advantage of Selling Bonds: No Dilution of Control. ...
- Disadvantage of Selling Bonds: Interest Payments.
There are also some potential drawbacks to issuing shares:
- diluted ownership.
- reduced control of your business.
- loss of privacy.
- administration costs.
- you may have to offer a monthly or quarterly dividend to investors.
- you may require the services of a solicitor or accountant.
Equity shares offer a compelling investment opportunity with the potential for high returns, dividend income, and ownership in companies. However, they also come with risks such as market volatility, no guaranteed returns, and the need for market knowledge.
What is an advantage to a corporation issuing stock? ›
Nevertheless, the advantages of issuing stock in your corporation are equally significant. You can probably raise more money by issuing stock than by borrowing. And when you issue stock, unlike borrowing, you aren't obligated to make monthly payments to stockholders.
How does issuing stock affect a company? ›
Earnings-Per-Share Impact
Issuing additional shares via equity financing decreases a company's earnings-per-share (EPS). For example, let's say a company needs to raise money, so it decides to issue an additional 5,000,000 shares to be sold in the market.
What is the purpose of issuing stock? ›
Companies issue shares to the public to raise money. They initially sell a set number of shares to investors, and then those same shares can be traded among investors on a secondary market. Issued shares are those that the founders or BofD have decided to sell in exchange for cash.
Why is issuing shares good? ›
A share issue has a very positive effect on your company's cash flow, which means that you can get on with growing the business and pay for the resources you need to build it more quickly.
What is the advantage and disadvantage of stocks? ›
Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns. By owning a mix of different investments, you're diversifying your portfolio.
What is common stock advantages and disadvantages? ›
Who Should Invest in Common Stocks?
| Common stocks |
|---|
| Advantages | Limitations |
|---|
| Potential profits | Market risks |
| Liquidity | Uncertain income |
| Limited legal liabilities | Fluctuating prices |
1 more rowOne of the most significant risks of becoming a shareholder is losing the capital you contributed to the company. For passive shareholders who don't contribute to the working capital of the company, this may simply be caused by an erosion of the value of their shares.
The pros of forming a corporation are that it offers limited liability for the shareholders, it is a separate legal entity, and it has perpetual existence. The cons are that it is more expensive to form and operate than an LLC, and it is subject to heavier government regulation.
What are the advantages and disadvantages of rights issue? ›
The main advantage of the rights issue is that It gives existing shareholders the exclusive right to purchase additional shares at a predetermined price. However, potential disadvantages include dilution of ownership for non-participating shareholders and market distrust, which could lead to a decrease in stock value.
What are the advantages and disadvantages of issuing preferred stock? ›
Preferred stocks are usually less risky than common dividend stocks, and carry higher yields, but lack the opportunity for price appreciation as the issuing company grows. They also go without voting rights.
What are the advantages and disadvantages of stocks? ›
Investing in stocks offers the potential for substantial returns, income through dividends and portfolio diversification. However, it also comes with risks, including market volatility, tax bills as well as the need for time and expertise.
What is the advantage and disadvantage of issuing equity? ›
While equity shares offer significant advantages, they are not without risks. Market fluctuations, economic downturns, and company-specific issues can impact the value of equity shares. It is crucial for investors to be aware of these risks: Market risk: The value of equity shares is influenced by market dynamics.
What are the advantages of issue of shares? ›
Firstly, they provide a direct and efficient method for raising capital. By offering additional shares to existing shareholders, the company can access funds quickly to finance various initiatives such as expansion plans, research and development projects, debt reduction, or other strategic objectives.
