What Are The Advantages And Disadvantages Of Issuing Shares?


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You do not have to be a publicly registered corporation to issue shares. In fact all corporations must issue at least some shares to the owners of the business upon formation.

Generally speaking there are only 3 ways money can come into the corporation, selling shares (equity financing), taking on debt (debt financing), and revenue.

There are really no disadvantages to having corporate revenue as a source of funds so when talking about the advantages and disadvantages of equity financing it is in the context of comparing it to debt financing.

The basic advantages of equity financing are that the funds can usually be kept indefinitely, no payments are required on the funds (dividends may be paid out but only on earnings) and no collateral is required for equity investment.

The basic disadvantages are that dividend payments are not tax deductible for the corporation, and the more shareholders a corporation takes on with equity financing the more shared control there is of the corporation (which can impose restrictions on how it operates), and the less profit there is for the corporation and its principal owners.

In comparison, debt financing allows for tax deductions on interest payments, has little or no impact on control of the corporation and allows leverage of company profits.

If a corporation does decide to become a publicly registered corporation, it has the advantage of having a much larger investment market from which it can receive investors. Corporations that are not registered are limited in the total number of investors it may take on and those investors must meet minimum levels of wealth and investment sophistication to be allowed to invest in the corporation.

The downside is that a publicly registered company must prepare legal and financial documents for filing and public disclosure that must meet certain legal standards both upon registration and on quarterly and annual bases as well as legal filings whenever certain business events occur within the corporation. The annual legal and accounting fees can add up to hundreds of thousands of dollars each year. If the corporation is not in a position to take advantage of the ability to sell to the public (there is not sufficient public interest in buying its stock or it is not in a position to use the additional funds to significantly improve its financial position), then being a publicly registered company can cost more than it is worth.

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