Legal Question in Business Law in California

Re: How Do I become a part owner of an Incorporation

First, you need to understand the basics of corporate formation and governance.

A corporation is owned by its stockholders and run by its directors, who usually delegate most of the day-to-day stuff to the officers, who in turn hire subordinate employees.

The directors are elected by the shareholders.

When a corporation is first formed, it usually has one or more incorporators and no stockholders, although the Articles of Incorporation can and sometimes do specify the initial directors. The incorporator can be the person(s) who is/are promoting the corporation, or someone working for him/them such as an attorney or a clerk at an incorporation service.

Incorporators who are mere functionaries and not the promoter(s) are expected to submit a letter of resignation, turning control over to the initial directors.

Corporations get shareholders by issuing stock to persons entitled to receive it. Since shareholders are at the top of the corporate power structure (they elect the directors), but the corporation doesn't initially have stockholders, the initial directors are, by law and tradition, the incorporator(s) or whomever the incorporators turned their powers over to.

Stock doesn't have to be issued by handing out engraved certificates. It can be "issued" by letter, or even by appropriate entries in the corporation's minutes and other books. Many small corporations don't use stock certificates.

A corporation should, however, get compensation in exchange for stock, and that should be at a consistent value, for fairness purposes. If Joe puts in $10,000 cash and gets 100 shares, then when Mary contributes an old truck worth $5,000, she should get 50 shares, and when Sam does $1,000 worth of legal services, he should get 10 shares IF it's intended that the three become shareholders under their contracts with the corporation. Contracts or subscriptions for stock can be written, oral or implied.

So, if you have a contract that you're to receive stock, you'll become a co-ownerwhen that contract is honored by the corporation by issuing you stock. Without an agreement that you are to receive stock for your services, howver, you can't demand stock.