Travis: Now, what is this whole deal with preferred stock and different classes of stock? What's the deal with that?
Jake: Well, there's usually two types of stock. First type is called common stock. Second type is called preferred stock. Common stock is just general stock that the company has. Preferred stock means that there is preferential treatment with that stock. It has some right tha the general stock holders do not have. It could be that if something happens to the company they get paid out first. It could be that their shares are… they have voting rights that the general stock holders don't have. There is some sort of preferential treatment that they receive versus the general stock holders.
Travis: I see. And those are defined in Articles of Organization?
Jake: They can be defined in the Articles of Incorporation, or they can also be defined in the bylaws and resolutions.
Travis: OK. Now, so, my listeners would be able to benefit with this information by issuing different classes of stock? Or, do you suggest that small business owners only issue one class of stock?
Jake: Part of the issue there is that if they're an S Corporation, they can only have one class, and that's called common stock. So, in many cases when small business owners are S Corporations, that decision is actually taken out of the equation, because they can only have common stock.
Travis: Well, that's probably nice for some people to not have to think about that.
Jake: Exactly. But, it really depends on their situation and you know, when you've got different people that come in, and they want to come into business together, they're really got to talk about their situation and what's the best and most equitable way to distribute assets and funding and such, and that's really something that they need to talk to each other and decide how to do that.