Preferred stock is a form of company stock shares which provides holders the priority of dividend payments and asset distribution over common stock shareholders in the event the corporation dissolves. Business owners need to understand preferred stock laws and regulations to ensure that they remain compliant with federal and state securities laws.
Preferred stock is governed primarily by the way a corporation sets up its stock. To make sure this is done according to state and federal laws, you need to:
1. Understand how corporate bylaws govern the stock.
2. Learn about how preferred stock is issued in venture capitalism.
3. Know the IRS regulations on taxation of dividend income and the differences between common and preferred shares of stock.
Determine the proper way your corporate bylaws will govern your preferred stock
Preferred stock is governed by the way a corporation sets up its preferred stock. To understand how corporations set up their stock, it helps to examine other corporate bylaws and forms for ideas on how to best establish and govern your own preferred stock.
Examine how preferred stock is issued in venture capitalism
State laws governing incorporation of companies will cover preferred stock. Preferred stock can be an issue in venture capitalism since venture capitalists could get preferred stock in companies they finance. To understand this venture capital association, examine model documents from states that have lead the way in corporate law and how it pertains to preferred stocks.
The State of Delaware
leads the way for corporate law in the United States, so it might help business owners to familiarize themselves with Delaware’s corporate regulations . The National Venture Capital Association website provides links to law firms throughout the country that the NVCA recommends businesses contact when seeking specific counsel and advice for your business on preferred stock laws and regulations.
Understand the IRS regulations on the taxation of dividend income and differences between common and
Preferred stock dividends have different tax obligations than bonds or common stock because the payments are based on a company's earnings, not interest. You will need to be familiar with these tax obligations to make sure your corporation's preferred stocks follow proper laws and regulations.
To best understand preferred stock laws and regulations, it helps to understand the IRS regulations on the taxation of dividend income, and the differences in IRS rules pertaining to common and preferred shares, as detailed in IRS Publication 550
. Ameritrade Financial also provides a concise explanation of the differences between common and preferred stock to help you understand how preferred stock laws and regulations.
- Purchasing preferred stock is advantageous for companies from a tax perspective. Federal tax guidelines permit a qualified company to exclude 70 percent of their dividend income received from other business from their gross income.