A young woman sits at a table and looks at the electronic tablet that she holds in one hand. Her other hand is on her chin, and she is smiling. A coffee cup and an open book sit next to her on one side of the table; some papers and a smartphone sit on the other side.
Offering a stock option to your employees gives them the opportunity to buy a specific amount of shares at a set price. — Getty Images/PeopleImages

Small businesses can raise capital and improve their balance sheet by issuing stock. However, they must meet certain conditions. The Securities and Exchange Commission (SEC) regulates securities markets, including sales of common stock from public companies. Private organizations can also issue stock and have shareholders but face less scrutiny from the SEC.

A certain type of stock called qualified small business stock (QSBS) has additional restrictions but is an excellent option for small businesses. Learn what’s involved with issuing stock and how to go about it.

What types of small businesses can issue stock?

Investopedia noted, “Private companies may issue stock and have shareholders, but their shares do not trade on public exchanges and are not issued through an initial public offering (IPO).” Small businesses structured as C corporations can issue stock through private placement. They must abide by Regulation D, rules 504, 505, and 506. The alternative is to take your business public.

The available options differ by the business entity:

  • Limited liability company (LLC): An LLC can’t issue stock or have shareholders. But it can provide membership units.
  • Limited partnership (LP): A publicly traded LP or master limited partnership (MLP) can offer ownership units to investors but not stock.
  • S corporation: According to the IRS, an S corporation can issue “only one class of stock” and “have no more than 100 shareholders.”
  • C corporation: Wolters Kluwer said a C corporation can have an “unlimited number of shareholders” and “more than one class of stock.”

[Read more: S Corp vs. LLC: What’s the Difference?]

Who regulates private and public securities sales?

If you issue stock to one or more people, you must abide by federal securities laws, regardless if your business is public or private. The SEC said, “This is true for companies of all sizes, private and public alike, and includes sales made to anyone, including friends, family, angel investors, and venture capital funds.”

Private companies can complete the IPO process to take their business public and issue stock. It’s an extensive and expensive effort, requiring underwriters and registering with the SEC. However, some organizations are exempt from registration requirements under the Securities Act of 1933.

Private companies may issue stock and have shareholders, but their shares do not trade on public exchanges and are not issued through an initial public offering (IPO).

James Chen, Investopedia

Here are common exemptions according to Investor.gov:

  • Stock offerings of a limited size.
  • Private offerings to a limited number of individuals or organizations.
  • Interstate offerings.
  • Municipal, state, and federal government securities.

In addition to the federal Securities Act of 1933 and the Exchange Act of 1934, states may require companies to register or claim an exemption. These are called blue sky laws, and regulations vary by state.

How do security offerings differ?

Although an LLC can’t issue stock, business owners may be able to raise funds through convertible notes while giving LLC members membership units. Likewise, private companies can issue stock to a select group of people without going public. But it’s important to understand the differences among securities.

The SEC defines the following key types of securities:

  • Stock: This gives stockholders or shareholders an ownership interest, known as equity, in a business. There are several stock classes, including common stock and preferred stock.
  • Membership interest: An LLC can provide membership units that denote an ownership interest. Members can transfer ownership interests according to state laws and the LLC’s operating agreement.
  • Stock option: This allows individuals, typically employees, the opportunity to buy a specific number of shares at a predetermined price.
  • Restricted stock: Companies issue restricted stock awards (RSAs) and restricted stock units (RSUs) to compensate employees.
  • Convertible interests: An investor may loan a startup company money using a convertible note. Instead of repayment, the investor may receive preferred stock.

[Read more: Private Equity vs. Venture Capital: What’s the Difference?]

Is my company a qualified small business?

QSBS stockholders can benefit greatly when they sell their shares after holding onto them for at least five years. Section 1202 of the tax code provides a substantial tax break, making this type of stock intriguing to venture capitalists and business founders. However, there are several restrictions for companies wanting to qualify to issue QSBS stock.

The fundamental conditions, according to the Small Business Administration (SBA), are:

  • The company’s business structure must be a U.S.-based C corporation.
  • Its assets must be $50 million or less before and after issuing stock.
  • The organization can’t be a holding company.
  • It must be in a permissible industry: retailing, wholesaling, technology, or manufacturing.
  • Corporations and shareholders must agree to provide stock documentation.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Applications are open for the CO—100! Now is your chance to join an exclusive group of outstanding small businesses. Share your story with us — apply today.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

Brought to you by
Simplify your startup’s finances
Not sure where to begin in getting your business’s finances in order? Navigating the complex finances of a growing start-up can be daunting. Learn about the key financial operations that will keep your startup running smoothly — from payroll to bookkeeping to taxes — in this guide.
Learn More