Legal Question in Business Law in California

First, the business would have to be organized as a corporation, i.e., incorporated. (I have seen examples of LLCs capitalized by selling 'stock,' but that's unusual). The Articles of Incorporation filed with the Secretary of State must specify the maximum number of shares the corporation is authorized to issue.

Next, remember that the corporation is a separate entity. You may run it by being its sole director, but you aren't the corporation and the corporation isn't you. The corporation is the issuer of the stock, and when the stock is placed on the market, it is the corporation that is selling the stock and receiving the proceeds of sale, not you -- although of course you are "selling" the stock in another sense, since the corporation is inanimate and must act through living human beings. Nevertheless, a stock sale is a transaction between the corporation and the investor. As soon as the first share of stock is sold, the corporation has money, or at least the right to receive money if the stock was sold on credit terms rather than for cash.

The facts that the corporation has no employees or no building are immaterial. As explained above, it will have money or the future right to receive money as soon as it makes its first stock sale.

The question "Could I sell 100% of the stock for a profit and stay out of legal trouble?" shows a lack of understanding of the process of capitalizing a newly-formed corporation. First, as explained above, it is the corporation that is issuing and selling its stock. Second, the sale of newly-issued stock does not and cannot result in making a "profit" by the issuer....the stock is exchanged for cash. A dollar of cash buys a dollar's worth of equity in the issuing company. It is an even exchange. No profit, no loss. Ask any CPA.

More importantly, however, the issuance and sale of securities of any kind is a HIGHLY regulated activity -- a minefield of risks for the uninitiated and uninformed promoter. I'd say that the ONLY way for your new business and you to stay out of legal trouble is for you to buy all the stock yourself. This is not only possible, it's one of the commonest ways that new corporations are financed. Joe Jones forms Jones & Co., Inc. to run his widget business. Jones & Co. is authorized in its Articles of Incorporation to issue up to 1,000 shares. On Day 1 of its corporate existence, Jones & Co. issues and sells 400 of those authorized shares to Joe, who pays the corporation $500 per share for them by writing his personal check to Jones & Co. for $200,000. (And presumably, on Day 2, Jones & Co. writes Joe a corporate check for $150,000 to buy the widget business from Joe, who has been previously operating it as his sole proprietorship). If the business was really worth about $150,000, no one has been cheated and no one has made a profit. Both transfers were made for value. Jones & Co. ends up with an operating business worth $150,000, plus $50,000 of working capital in the form of paid-in cash.

So, to a large extent, the corporation and its promoter(s) don't have to worry about setting a value for the stock, since every dollar paid for the stock goes into the corporation and enhances its value by a dollar. If new corporation X sells 500,000 shares at $1, the corporation is now worth $500,000........and if it sells 1,000 shares at $500, it is now worth the same -- $500,000. Or, new corporation X could sell 300 shares at $3, and would then be worth $900. No profit is made. There is only a fair exchange of stock for money.

Of course, a new corporation with unseasoned management and an uninteresting business plan probably won't be able to raise $500,000. The amount that a new business can raise is generally a reflection of confidence in its promoters and management and the overall attractiveness of its business plan.

California and Federal law, as well as the laws of all other states, closely regulate all aspects of corporate securities issuance and sale. For California, you need to be generally familiar with Corporations Code sections 25000 et seq., the Corporate Securities Law of 1968. An important sub-part is section 25102, which provides for exemption from qualification of small and limited offerings of corporate securities. Most new small business can and do qualify under 25102, but the section is long and detailed and MUST be read and understood by any corporate promoter and/or his attorney! If all buyers of your stock are in California, adhering to 25102 will probably keep you within Federal law as well.

All in all, I think you need to learn quite a bit more about the fundamental concepts of business formation and capitalization at a very basic level. Maybe acquiring and reading a few of those paperback self-help business and law books would be a good start. I often recommend the ones by Nolo Press, written by attorney Anthony Mancuso, but there are others, and I'd get at least two or three and go over the stock-issuance sections in particular.