Buying a stake in a company means acquiring equity: shares of stock in a corporation or a membership interest in an LLC. If the company is publicly traded, you open a brokerage account, place an order, and own the shares one business day later. If it’s private, you negotiate a price with the company or an existing owner, review its financials and governing documents, sign a purchase agreement, and wire funds to close. The public path takes minutes; the private path usually takes weeks and involves lawyers. Almost all of the complexity lives on the private side.
Buying Shares in a Public Company
Public stock trades freely on an exchange at a market-set price. You buy through a registered broker-dealer, and three steps get you from cash to ownership.
Open and Fund a Brokerage Account
Every brokerage must verify your identity under the USA PATRIOT Act, which means collecting your name, date of birth, residential address, and taxpayer identification number (usually your Social Security number).1U.S. Securities and Exchange Commission. Customer Identification Programs For Broker-Dealers – Final Rule Expect additional questions about your employment, income, net worth, and investing experience; those come from separate suitability obligations.
Fund the account by ACH transfer (one to three business days) or wire (usually same day). Most brokerages let you trade on deposited funds before the transfer fully settles, though policies vary.
Place the Order
Enter the ticker symbol and choose an order type. A market order buys immediately at the best available price, which is fast but offers no price protection. A limit order sets the maximum you’ll pay per share; the trade executes only if the stock reaches your price, which protects you from overpaying but risks not filling at all.
Settlement
Legal ownership transfers one business day after your trade date under the T+1 settlement cycle, which the SEC shortened from T+2 in May 2024.2U.S. Securities and Exchange Commission. Shortening the Securities Transaction Settlement Cycle Buy Monday, own Tuesday.
A Word on Margin
Brokerages will lend you money to buy stock through a margin account. FINRA requires you to maintain equity of at least 25% of your holdings’ market value; fall below that and the brokerage issues a margin call or liquidates positions to cover the gap.3FINRA. Margin Requirements Margin magnifies gains and losses. For a first stake in a company, skip it.
Buying Into a Private Company
Private companies don’t file public financial reports, and their shares don’t trade on an exchange. You buy directly from the company or an existing owner, at a negotiated price, on terms set out in a written contract. The company’s own documents decide whether you can buy at all and what rights come with your stake.
Do the Diligence Yourself
Nobody is going to hand you SEC filings. Ask for at least three years of financial statements: income statements, balance sheets, and cash flow statements. If a CPA hasn’t audited them, seriously consider paying for an audit before you close. Request federal and state tax returns for the same period; gaps between the returns and the financials often surface problems the seller didn’t volunteer.
Check revenue concentration. If one or two customers drive more than 30% of revenue, the business is a lost contract away from a crisis. Ask what contracts those customers have, how long they run, and whether they include renewal or minimum-purchase terms.
Then request the governing documents: articles of incorporation (or articles of organization for an LLC), bylaws or operating agreement, and recent board minutes. These show how the company is actually run, what limits exist on share transfers, and whether owners are already fighting. Ask for a written disclosure of pending or threatened litigation, so you can price the risk instead of inheriting it.
Figure Out What the Stake Is Worth
On a public exchange the price is the price. In private deals you have to build it. The three common approaches are comparable company analysis (using revenue or earnings multiples from similar businesses), precedent transactions (prices paid in recent acquisitions of similar companies), and discounted cash flow modeling (projecting future cash flows and discounting them to present value).
Private stakes trade at a discount to comparable public ones because you can’t easily sell. Buyers typically apply an illiquidity discount of 10% to 30% on top of the comparable analysis, and higher for very small businesses that depend on one or two individuals. When the seller is also the person setting the price, an independent valuation professional is worth paying for.
Confirm You’re Eligible to Invest
Many private offerings are limited to accredited investors under SEC Regulation D. As an individual, you qualify with a net worth above $1 million (excluding your primary residence), or annual income above $200,000 individually or $300,000 jointly with a spouse or partner in each of the last two years with a reasonable expectation of matching it going forward. Certain licenses, including Series 7, 65, and 82, also qualify you regardless of income or net worth.4U.S. Securities and Exchange Commission. Accredited Investors
How you prove it depends on the offering. Under Rule 506(b), the company needs only a “reasonable belief” that you’re accredited, often satisfied by a self-certification checkbox in the subscription agreement. Under Rule 506(c), which allows public advertising, the company must take “reasonable steps to verify” your status, typically by reviewing tax returns, bank statements, or a letter from your attorney or accountant.5U.S. Securities and Exchange Commission. Assessing Accredited Investors under Regulation D Rule 506(b) offerings can include up to 35 non-accredited investors, and those investors must receive the same disclosure materials accredited investors get.6U.S. Securities and Exchange Commission. Private Placements – Rule 506(b)
Sign the Purchase Agreement
The central document is a stock purchase agreement or subscription agreement. It states the number of shares, the price per share, the total amount due, and the representations each side makes about the deal.7U.S. Securities and Exchange Commission. Form of Stock Purchase Agreement You supply your full legal name, address, and total dollars paid. The agreement also includes warranties in which you confirm you’ve reviewed the financials, understand the risks, and, if relevant, meet accredited investor thresholds.
Read the representations and warranties section rather than skimming it. By signing, you’re making binding statements about your own sophistication and acknowledging specific risks. If a dispute follows, the company will point to those warranties as proof you went in with open eyes.
Close the Transaction
Funds usually move by wire transfer to the company’s designated bank account. Some deals use digital signature platforms; others still want original ink signatures at the registered office. Once the company receives your money and your signed documents, the corporate secretary updates the capitalization table, which is the master ledger of every shareholder, their share class, and their percentage of the company. For most private companies today, a PDF of the updated cap table is your primary evidence of ownership. Formal stock certificates still exist but are increasingly rare.
Know What Kind of Stake You’re Getting
Common Stock vs. Preferred Stock
Not all shares carry the same rights. Common stock gives you voting rights and a share of profits, but you’re last in line if the company is sold or liquidated. Preferred stock typically pays a fixed dividend and gets paid before common shareholders in a sale or bankruptcy; in exchange, preferred holders usually give up voting rights.
In startup and venture capital deals, preferred stock almost always includes a liquidation preference. Preferred investors get their money back, sometimes at a multiple, before common shareholders see a dollar. If the company sells for only slightly more than it raised, preferred holders can walk away whole while common holders get nothing. Confirm in writing where your shares sit in that payment hierarchy.
LLC Membership Interests Work Differently
If the company is an LLC, you’re not buying stock. You’re acquiring a membership interest, and the terms are governed almost entirely by the operating agreement rather than corporate law. That agreement controls who can become a member, whether existing members must consent to the transfer, and what economic and voting rights come with the interest.
One distinction matters more than any other: many operating agreements let a buyer take on the economic rights (the right to receive distributions) without full membership rights (voting and management). You could pay for a stake, receive distribution checks, and have no say in how the company is run. Before closing, get it in writing whether you’re receiving full membership rights or only an economic interest. After the transfer, the operating agreement itself should be amended to reflect your ownership, capital account, and voting rights.
Transfer Restrictions to Read Before You Sign
Private company shares almost always come with strings attached. Look through the shareholder agreement or operating agreement for these provisions before you commit:
- Right of first refusal, which forces you to offer any future sale first to other shareholders or back to the company at the same price and terms.
- Drag-along rights, which force you to sell along with the majority if they vote to sell the whole company.
- Tag-along rights, which let you sell on the same terms when a majority shareholder sells, so you’re not left behind after the controlling investor exits.
- Lock-up periods, which prohibit any sale for a set period after purchase, often one to three years.
- Board approval requirements for any transfer.
These terms are negotiable before you sign and nearly impossible to change after. If a provision troubles you, raise it during the deal. Once you’re on the cap table, you’re bound by whatever the agreement says.
Taxes to Know Before You Buy
Qualified Small Business Stock (Section 1202)
Original-issue stock in a small C corporation may qualify for a capital gains exclusion under Section 1202. The company must have had gross assets of $75 million or less when it issued your shares and must run an active business rather than an investment or financial services operation.8Office of the Law Revision Counsel. 26 U.S. Code 1202 – Partial Exclusion for Gain From Certain Small Business Stock
For stock issued after July 4, 2025, the exclusion is tiered: 50% at three years held, 75% at four years, 100% at five years or more. Any non-excluded portion is taxed at a 28% capital gains rate rather than the standard 20%. The maximum excludable gain per company is $15 million or 10 times your adjusted basis, whichever is greater. Stock issued on or before July 4, 2025 follows the prior rules with a $10 million cap and a flat 100% exclusion after five years.8Office of the Law Revision Counsel. 26 U.S. Code 1202 – Partial Exclusion for Gain From Certain Small Business Stock
Section 1244 Ordinary Loss Deduction
If a small business investment goes bad, Section 1244 lets you deduct up to $50,000 of the loss as an ordinary loss ($100,000 filing jointly), instead of being capped at the $3,000-per-year limit on capital losses against ordinary income. The stock must have been issued directly to you by a domestic small business corporation.9Office of the Law Revision Counsel. 26 USC 1244 – Losses on Small Business Stock
Wash Sale Rule
Sell a public stock at a loss and repurchase the same stock, or something substantially identical, within 30 days before or after the sale, and the IRS disallows the loss. The disallowed amount gets added to the basis of the replacement stock, which defers the benefit rather than eliminating it.10Internal Revenue Service. Case Study 1 – Wash Sales Investors who sell to harvest a loss and immediately buy back in often think they’ve locked in the deduction. They haven’t.
Records to Keep After Closing
Save everything from the transaction: the purchase agreement, wire confirmation, cap table, any stock certificate, and correspondence about the deal terms. Brokerages retain public trade confirmations electronically, but download your own copies.
Expect a Form 1099-B from your brokerage for any public stock you sold during the year.11Internal Revenue Service. Instructions for Form 1099-B (2026) If your private stake is in an entity taxed as a partnership, which includes most multi-member LLCs, you’ll receive a Schedule K-1 with your share of the company’s income, deductions, and credits. K-1s often arrive late, sometimes after the April filing deadline, so an extension is worth considering. Report the K-1 amounts consistently with how the partnership reported them; inconsistent filing without notifying the IRS can trigger accuracy-related penalties.12Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065)
Keep the private company updated on your current mailing address. Dividend checks, tax documents, and shareholder notices all go to the address on file, and missing a required vote or distribution because your contact information was stale is an unforced error.