Shares, Stocks, or Both?
Do healthcare practices have shares or stocks? Is there a difference? Here’s what owners need to know when they launch a new practice.
Terminology and processes around issuing stock often confuse new business or practice owners. Many ask us, “What’s the difference between shares and stocks?” This article will explain the two concepts and why the distinction matters for healthcare professionals who own professional corporations.
Shares and Stocks Explained
While you’ll hear people use the terms “stock” and “shares” interchangeably, they are not synonymous. Stocks represent a partial ownership interest in a corporation. Units of stock are called shares. Each share is a single unit of equity ownership in a corporation. It is the smallest denomination of a corporation’s stock and has a specific value (called “par value”). For example, a share’s par value may be one dollar.
Another quick clarification: these terms apply only to corporations. Limited liability companies such as LLCs and PLLCs do not have stocks, shares, or shareholders. Instead, these entities have members. The members have “interests,” as set forth in the operating agreement.
How Do I Create Shares?
Before answering this question, we should establish two more definitions. Authorized shares are the maximum number of shares a corporation can issue. Meanwhile, issued shares are a subset of authorized shares that have been sold and are held by shareholders in the corporation. A share can be authorized, but not issued. In contrast, a share cannot be issued if it hasn’t been authorized.
Authorizing and Issuing Shares During Business Formation
Shares are authorized in the articles of incorporation — the document filed with the state that establishes relevant business information. The corporation itself sets the number of shares it is authorized to issue. For instance, the articles of incorporation will read something like: “The total number of shares which this corporation is authorized to issue is 10,000 shares.”
Once the initial resolutions and bylaws (i.e., the formation documents) are drafted, the corporation has the authority to allocate new shares to its shareholders. Again it can issue only up to the number of authorized shares.
Let’s say John wants to open a new professional corporation and authorizes 10,000 shares in the articles of incorporation. He will then issue the shares by exchanging some of his capital for the 10,000 shares he authorized. Here, we’re assuming John wants to control all the shares and does not foresee that he will add any business partners anytime soon. If the par value of each share is $0.10, he will pay $1,000 to finance the corporation and put the stock into effect.
Authorizing and Issuing Shares Later In the Business Lifecycle
Corporations are not limited to authorizing and issuing shares only at the time of formation. If needed, shareholders can increase the number of authorized shares. But to do so, they must follow the bylaws of that corporation and state law. In other words, you can change the number of your corporation’s shares and transfer your shares to others — it is not set in stone at the outset.
How Many Shares Should I Authorize?
Next, clients ask us, “How many shares should I authorize for my small healthcare practice?” The answer varies depending on the situation. But while it’s crucial to determine a number, the number itself is less consequential. You can change it later. What matters most is that the number of shares and each share’s par value is appropriate to constitute the initial funding of the corporation.
It is common to see a high number, such as 10,000 or even 10,000,000. Typically, you’ll want to avoid numbers less than 1,000. The goal is to authorize enough shares to allow you to distribute them accordingly if you issue additional shares to new business partners. This is not to say that you cannot choose to authorize a low number of shares. However, most business owners find it reassuring to hold a high number of shares in their corporations.
We also recommend making it easy to calculate percentages. Seven might be your lucky number, but you will probably regret authorizing 7777 shares if you add partners in the future.
Some states may base your tax rate on the corporation’s number of authorized shares. An experienced attorney will know when to flag this, and it may play a role in determining the number of shares to authorize and issue.
Special Considerations for Healthcare Professionals
When it comes to owning a professional corporation such as a PC, it matters who has stock and what credentials they hold. In some states, the Corporate Practice of Medicine (CPOM) may limit who can own shares in a professional corporation.
Moreover, states may impose restrictions on the number of shares a professional can own. In California, for example, a nurse practitioner cannot control more than 49% of the issued shares in a medical corporation. These distinctions matter and, if done incorrectly, can put your license at risk.
Get Legal Support
While this article provides a basic introduction to corporate formation topics, we understand that questions surrounding stocks and shareholders can quickly become complicated. In light of the tricky legal distinctions and ever-changing regulatory landscape for healthcare providers, you should work with an experienced healthcare attorney to file articles of incorporation, start a business, or transfer shares.
This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader. It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.