Business Ownership Documents Explained
Documents are instrumental to proving business ownership. Regardless of the type of entity, existence or formation of a business must be shown through documentation. Further, certain documents are key to shaping a complete picture of business ownership.
Corporations
For corporations, evidence of ownership includes not only documents showing the corporation’s formation and continued existence, but also documents showing the stock ownership or equity of the company. The corporation’s state charter will include the number of authorized shares of stock, and the bylaws will specify how the number of shares can be changed and what the requirements are for each class of shares, if there is more than one. The articles of incorporation, sometimes called a certificate of incorporation or certificate of formation, will typically show when the corporation was formed and where.
Limited Liability Companies
Each state has different rules for the formation of limited liability companies (LLCs). LLCs do not issue stock, and there are few formal requirements for ownership. However, most will have a document that shows who the owners are, and how the management is structured. While it is not commonly required, an LLC may have an operating agreement which will detail the rights and obligations of the members and meet the statutory requirements for forming an LLC.
Partnerships
Similarly , partnerships may have only a few formalities, but they treat various forms of ownership differently. A general partnership is usually formed when two or more parties form an agreement to undertake a business together. A limited partnership is often formed with one or more general partners and one or more limited partners. Documents evidencing formation of partnerships may be filed with a state or federal agency, or may simply be created by the parties amongst themselves.
S corporations
S corporations are just corporations that are taxed as partnerships. An S corporation elects to have its tax treatment changed, and it complies with this tax regulation, but it is subject to certain limitations and requirements of S corporations. Some states may have subsidiaries that are treated differently than others, and state treatment of S corporations may vary from state to state.
Limited liability partnerships
Becoming and maintaining status as a limited liability partnership can be complex and vary from jurisdiction to jurisdiction. Generally, limited liability partnerships are required to file a list of partners with the jurisdiction in which it was formed, and are subject to certain requirements for purported limited liability status.
Charter Documents
Articles of Incorporation are formal documents that establish a corporation within a specific state, and are filed with the appropriate state office, typically in the office of the secretary of state. The information contained within the Articles of Incorporation is similar to what is found in the bylaws, and generally includes such information as the name and address of the business, the purposes of the entity, the number of shares of stock to be issued, the registered agent, and various other provisions of relevance to the company.
The Articles of Incorporation serve as proof that a corporation exists. They are usually not necessary unless there is some significant question as to the legitimacy of the entity. Generally, Articles of Incorporation are not needed for entities that do not operate formally as corporations. For example, an unincorporated company is not required to file any documents other than possibly with the county clerk or department of taxation in order to have a registered fictitious name for the business, etc.
Operating Agreements and Bylaws
Organized corporations and limited liability companies ("LLCs") are required to have agreements in place that outline their organization and management. It is vital that these documents are in order. They can be used to evidence your ownership if the other company records are missing. For example, if you formed a corporation 15 years ago, and have since lost track of its financials, you may not have any other way of proving your ownership of it other than seeing if there is an agreement that identifies your ownership and the extent of your interest in the business.
Corporations are generally required to have bylaws and operating companies are required to have LLC agreements. In LLCs, this form of agreement is also known as an operating agreement. These agreements should identify the owners, outline the management structure, and describe the level of control each has over the organization. The information contained in these documents can significantly help prove your ownership of a company.
Stock Certificates and Stock Ledger
In a corporation, ownership is evidenced by the issuance of shares. Shares are created and assigned to a shareholder pursuant to law and the corporation’s governing documents. In British Columbia, shareholders receive share certificates, which evidence their ownership of shares in that corporation. On may request that his or her names be registered on the records of the corporation as a shareholder. The shareholders of a corporation maintain a stock ledger, a written record that identifies the shareholders of a corporation and the number of shares owned by each shareholder.
The share certificate and the stock ledger provide prima facie evidence of whom a corporation’s shareholders are. Such evidence may be rebutted if someone can show that someone’s name was not recorded when it should have been or by establishing that a shareholder does not in fact own the shares appearing on the share certificate or the stock ledger.
Where a corporation issues share certificates, it must do so into the following three categories:
A share certificate is not valid unless it is signed at least by one of the following persons:
Partnership Agreements
Partnership Agreements are used to establish who owns what percentage of a partnership. If a business is a partnership, then a partnership agreement will most likely be in place. The terms of the partnership must then be followed. In determining how the business should be operated, a partnership agreement is even more important than operating agreements or shareholder agreements. A partnership agreement contains the names of the partners, the name of the business, how much each partner contributes to the business, and how much each partner will own of the business. This documentation will later be used to prove how the business is being owned and operated.
Purchaser Agreements
Purchase agreements are the documents that you sign when a business is purchased or you buy a stake in or interest in a business. That is, these are the contracts through which you buy-not the ones that may or may not give you an interest in a business. Let me give you an example. Joe starts a landscaping business and has 5% held by his wife, 5% held by his sister, and 90% held by him. When Joe wants to sell the business, he sells the 90% . In that case, your ownership of the 5% held by his wife or 5% held by his sister would not be proved by this document. However, if your 5% interest was documented by this document, it would appear to be proved.
The documents should also reference the purchase price and how the purchase price was determined such as through an appraisal, sale of stock in the past or assessment by the company. The purchase price may be contained on a separate piece of paper referred to in the purchase agreement or it may be contained within the purchase agreement itself.
Government Filings and Licenses
A certificate of incorporation or articles of organization issued by a Secretary of State, business license or other permit issued by a county or city office or department of public health also confirm the existence of a business, its date of incorporation or organization, the name of the business owner, and the type of business that is being conducted.
Commonly issued certificates, licenses and permits include:
• Corporations and limited liability companies are generally registered with the Secretary of State.
• Sole proprietorships and partnerships are usually registered at the county level with the County Clerk.
• Corporations and limited liability companies that manage regulated or licensed businesses will typically be registered with a city or county or state office responsible for oversight of that industry, such as a department of public health, agriculture, or gaming.
• Business licenses are usually issued by a city department of finance or treasury, which may licensing and overseeing business operations for different types of businesses.
• Permits to construct or remodel are usually issued by a city or county planning or building department.
Intellectual Property Registrations
In addition to the incorporation documents and/or other business documents evidencing the formation of the company, intellectual property registrations may also confirm ownership of the business itself. A trademark certified by the US Patent and Trademark Office can potentially be used as evidence of business ownership (as long as it is a valid or enforceable trademark). A copyright registration, likewise, may be registered with the US Copyright Office, which may also evidence ownership. And a patent may have been applied for and/or granted by the United States Patent and Trademark Office evidencing the grant of a monopoly in its subject matter to the true claimant.
Storing and Securing Business Ownership Documents
To avoid losing or misplacing your key documents that confirm your ownership in a business or share of stock, you should keep them in a safe place such as a fireproof box or safe or with a trusted third party, such as your attorney or accountant. Electronic storage is also a solution, either on a computer or other electronic media (assuming you can easily access it when you need it) or by storing them in a cloud service so they are accessible anywhere. While technology continues to evolve and better options become available for storing paper documents electronically , be careful not to use documents with disappearing ink or shredded paper or any other "degradable" paper.
In lieu of physical hard copies, it is increasingly common to maintain electronic copies of key documents. However, paper documents and electronic documents can be easily deleted or damaged – and Murphy’s Law applies – at the worst possible time. That is why it is essential to back up digital record keeping systems and regularly update the backup process.