ISSUING SHARES

1. A potential shareholder delivers a subscription agreement asking for the purchase of shares. The offer is generally irrevocable for some time.
2. The subscription agreement is agreed to by the corporation.
3. If full, agreed-upon consideration is not paid for the shares, the corporation or its creditors can seek recovery of the shortfall from the shareholder. The corporation should keep proof that each shareholder fully paid for his or her shares.

Loans to the Corporation vs. Equity Contributions
The incorporators of a business often must decide whether to treat some initial contributions as debt instead of stock. Among the principal considerations are:

1. If the corporation is undercapitalized, creditors could pierce the corporate veil;
2. Repayment of debt may be tax-free to the recipient. Repayment of equity may result in taxable income to the recipient;
3. If the business fails, loans by shareholders are more likely to be treated as short term capital losses. If stock qualifies for Internal Revenue Code § 1244 treatment, stock losses, up to a certain amount, will be given ordinary loss treatment;
4. If the corporation fails with assets, the debt holders have priority to assets;
5. If the debt-equity ratio is disproportionate the IRS may treat debt as a second class of stock. This can result the automatic cancellation of any S corporation election;
6. Payment of interest on debt is deductible by the corporation. Payment of dividends is not generally deductible;
7. If the corporation grows in value, the appreciation benefits shareholders. Creditors generally do not participate in the appreciation; and
8. Debt holders are not entitled to vote on corporate matters.

Security Agreements
If loans are made by shareholders or their families to a corporation, review the possibility of securing the debt by assets of the corporation. If the corporation's business subsequently ends, the secured creditors may be in a better position for recovery of their investment. However, the bankruptcy court may limit the rights of shareholder creditors, especially if the corporation was undercapitalized.