Originally posted on https://www.exhibitindexes.com/blog/stock-certificates-can-be-a-confusing-topic-if-not-properly-educated-we-share-what-type-of-business-entity-has-the-legal-authority-to-emit-stock-certificates/
Stock certificates have been around for a long time – hundreds of years in fact.
The oldest known stock certificate dates back to 1606 and was issued in the Netherlands to a Pieter Hermanszoon Boode. He worked for the local mayor’s office as a personal assistant. He passed it down through his family and it was discovered by a university student accidentally in 2010.
We’ve come a long way since then and stock certificates become commonplace for businesses over the last two centuries. But with the digital revolution, now there is some debate about whether stock certificates still have a place in modern business.
We’re going to walk through what type of business entity has the legal authority to emit stock certificates and why they are still relevant today. We’ll also provide all of the information you need to issue a stock certificate.
Let’s walk through the what, when, how and why of stock certificates to give you the full picture.
What Type of Business Entity Has the Legal Authority to Emit Stock Certificates?
When setting up a business entity you have a number of options, most common are a corporation and a Limited Liability Company (LLC).
Both offer you a similar level of protection personally but the differences mainly surround the rights of each owner and the ways in which interests in the business can be shared or sold.
This affects whether a business can legally issue a stock certificate as such.
Corporation Stock Ownership
A corporate legal structure is the only entity that may issue stock to its owners. That stock represents shareholders ownership in the corporation. Most corporations allow you to freely transfer ownership and once transferred, the buy retains all voting and financial rights to the share.
So as a corporation, you are able to issue stock certificates to your shareholders.
LLC Membership Rights
With LLC entities it works a little differently. Instead of stock, each owner has membership rights which entitle them to a pro-rata share of assets and earnings and the right to participate in the management of the company.
When an owner sells to a non-member, the non-member takes the financial value of the rights but does not gain access to take part in the management of the company. This is to protect the business from frequent changes in management.
Most jurisdictions now actually allow for draft agreements that include the transfer of management rights as well as financial.
In short, corporations release stock certificates while LLC companies use a system of membership certificates for owners based on membership rights rather than ownership.
When Does a Business Distribute Stock Certificates?
If the corporation has been set up without provisions to handle stock ownership digitally with electronic ownership then paper certificates may still be required.
Generally, paper certificates are not used as frequently nowadays but some shareholders still prefer to have them. A lack of hard proof in stock agreements can lead to misguided concerns and disputes, so certificates and records can help mitigate this.
It also adds reputability to a company if they offer certification of ownership or membership in paper form.
Also, if a corporation releases a restricted stock and needs to issue a statement alongside this stock release then they would also use a paper certificate.
How Does a Business Distribute Stock Certificates?
There are a few simple steps to allow your business entity to distribute stock certificates to your shareholders. If you’ve never done it before, you might be surprised at how easy it is.
1. Review The Number of Authorized Shares
This information should be available in your articles of incorporation. It could also be tracked down in public records of the Secretary of State in the state of issuance.
Make sure you issue shares for less than 50% of all authorized shares so that more members added in the future don’t need a new authorization of shares by pre-existing shareholders.
2. Calculate the Percentage Ownership of Each Owner
Allocate the correct number of shares based on the number of shares to be issued and the percentage ownership of the shareholder.
For example, a shareholder might own 10% of a recently formed company. There are 300 shares authorized and 150 shares to be issued. In this case, the shareholder will receive stock certificates for 15 shares. This needs to be included on the certificate.
You may also want to consult a legal or financial advisor at this stage to make sure you are allocating the appropriate number of shares for this stage of your business.
3. Create a Stock Certificate
When creating your certificate, it needs to state the name and number of shares of the stockholder as well as a certificate number so changes in share ownership can be easily traced. This should all be well documented and recorded in case of future disputes.
A listing of all shareholder details including name, address, shares held and certificate numbers, should then be entered into the articles of incorporation. You should also have another copy that is easily accessible by a secretary of the company. An official certificate should be sent by certified mail to each shareholder.
If you’re not quite sure how to create something professional and official for your certificate, there are plenty of Stock Certificate Templates to choose from. Quite often the stock certificates are very formal in design so it can help to use a template instead of designing one of your own.
Why Certificates – Is There An Alternative?
Stock certificates have been popular over the years and many corporations have found ways to personalize the process such as Disney releasing illustrated stock certificates up until 2013.
However, as with everything else, the digital transformation of business in recent years has seen a shift towards electronic share registration. Essentially, all you need to do this is a reliable digital system to efficiently transfer, track and record all share transfers and ownership.
There are three steps to follow to issue uncertified shares:
- Make a board resolution stating that the company is authorized to issue uncertificated shares.
- Next, you may need to update the company by-laws to the same effect.
- Then you can start issuing shares by recording them on the company’s official stock ledger
With uncertificated shares, every share transaction can be easily documented and verified in an electronic form. Every shareholder can then be allowed access to this information (in accordance with their information rights). This reduces the risk of any disputes over ownership or transactions.
Just to be clear, while you can, in theory, do this using an internal spreadsheet it is best practice to use a specially designed software to manage your shareholder or membership transfers and records.
We should also point out, although a small percentage of corporations have completely stopped using paper certificates, many use a combination of both electronic recording and issuing paper certificates in some specific instances.
We’ve been using certificates for a long time for good reason and there is not necessarily any need to reinvent the wheel when it comes to stock certificates.
Are Certificates Stock Standard?
Whilst there has been talk of whether stock certificates are still useful and relevant to today’s shareholders, there is no doubt to us that they continue to serve a purpose.
You should have a combination of both electronically documented shares and ownership as well as certificates when they are required or requested by shareholders. It is usually in a corporation’s best interest to issue stock certificates to comply with the law as well as attract more investors.
Let’s not forget that there is also a ceremonial aspect of stock certificates. People have been buying stock certificates as gifts for loved ones for years, with the earlier mention of Disney being significant. The illustrated certificates were popular as a gift for children who would own a share of Disney for later on in life.
Now, you might not be Disney but there are often still times when the certificate is ceremonial rather than necessary.
Sometimes the shareholders want the paper certificate at a symbolic statement of their ownership of the company, especially if it signifies a momentous landmark in their career. You just cannot get that feeling with a digital transaction.
Now you should be familiar with what type of business entity has the legal authority to emit stock certificates and how it works for those who don’t.
If you want more detailed information on stock certificates, you can find out much more on our blog.