What is the Difference Between Common Stock and Preferred Stock?

When a corporation is incorporated, the Articles of Incorporation describe the type of stock that the corporation is authorized to issue.  At a minimum, the Articles will authorize the issuance of voting common stock.  The Articles may also authorize the issuance of non-voting common stock and/or preferred stock. 

The rights and obligations of the holders of the preferred stock are set forth in the Articles, the Code of Regulations and/or in a separate shareholder agreement.  Generally the holders of preferred stock are promised an annual rate of return, and given a priority over the common stockholders as to distributions and liquidation proceeds.  The preferred distributions are cumulative in nature, so if the corporation cannot afford to pay the preferred distribution in one year, the corporation must pay the accrued distribution from past years plus the current year preferred distribution before the corporation can make any distributions to common stockholders.  The holders of preferred stock generally do not vote, but the preferred stockholders may be given voting rights if there is a payment default.

When a corporation is seeking to raise investment monies, the corporation may offer the investors preferred stock.   Preferred stock is often the security of choice in this situation because it puts the investors (as preferred stockholders) ahead of the common stockholders in terms of rights to distributions, yet does not give them voting rights absent payment default. Preferred stock is also often used in situations where the older generation wants to turn voting control of the corporation, and future appreciation in value of the corporation, over to the younger generation. 

An important point is that “S” corporations may only have a single class and therefore are not able to issue preferred stock.  More about the single class of stock rule for “S” corporations will be found in a future blog.

If you would like to know more about preferred stock or how you can use preferred stock as part of an investment offering or an estate freeze, give me a call.  Jsenney@pselaw.com or 937-223-1130.

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AND ONE MORE THING.  Know anyone with state or local tax issues?  Ohio has a legion of private collection attorneys working to collect income, sales and other taxes.  Ohio has no collection statute, and I am aware that Ohio collection attorneys are trying to collect tax assessments that are more than 20 years old.  If you want to talk about state or local taxes, give me a call or email.  Jsenney@pselaw.com or 937-223-1130.

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