Common Stock or Preferred Stock – What’s the Difference?

Have you ever heard the term “preferred shares” or “preferred stock” and wondered what it meant?

Shares, or stock (the word is pretty interchangeable) refers to the units of ownership you have in a corporation. If you had an LLC, they would be called Membership Interests, and if you had a limited partnership, they would be called limited partnership interests.

Common Shares

There are two basic kinds of shares – common and preferred.

Common voting shares are the most popular and best-known share type. Common shares are always voting shares, with every share being entitled to 1 vote. So if you have 55 shares and someone else has only 50 shares, you can outvote that person because you have more shares. On the other hand, if your corporation has three shareholders and you have fewer shares than the other two do when put together, there is a chance that those two shareholders could vote their shares together and outvote you. Shareholders don’t necessarily vote on the day-to-day decisions involved in running a corporation, but they do vote on most of the larger ones.

Preferred Shares

Other kinds of shares may not be able to vote but may instead get a larger share of the profits. You’ll often hear these called “preferred non-voting” shares. The preferred reference doesn’t mean they’re better than common shares. It just means that they will usually receive dividends ahead of common shares, as a trade-off for the owners not being able to vote on most corporation matters. Still other kinds of shares may have voting rights in some situations, but not in all situations (“special voting” shares).

If you’ve established yourself as an S Corporation, you are only permitted to issue common voting shares. C Corporations are allowed to have as many other kinds of shares as they want, in addition to common voting shares.

Generally speaking, most corporations don’t need anything other than common voting shares. We see the preferred and special voting shares most often in big corporations, and especially in public companies. If you think you may want to have some preferred or other specialty shares in your corporation, talk to your lawyer first. It’s not something to try on your own, without legal advice and assistance. Chances are you’ll need to make an extra filing with the Secretary of State, and you’ll have to lay out all of the rules around your specialty shares when you incorporate. Fixing or changing it later can be costly, so our recommendation is to get advice ahead of time on this issue.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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