Starting and growing a business depends upon having sufficient funds. If you organize your business as a corporation, issuing shares of stock can be a primary means of raising capital. Using stock certificates is one way of providing investors with evidence of their stake in the corporation.
Shares of stock and stock certificates
A share of stock represents a certain percentage of ownership of a corporation, which is based upon the total number of shares that are issued. For example, if a total of 100 shares are issued, one share represents a one-percent ownership interest. If there are a total of 100,000 shares, it takes 1,000 shares to have the same percentage of interest.
Shares of stock are only issued by corporations, both C corporations and S corporations, and not by other types of business entities, such as limited liability corporations (LLCs), partnerships, or any form of limited partnerships. A stock certificate is a physical, written document that indicates the number of corporate shares of stock owned, although there are other ways to record ownership.
At one time, stock certificates were issued to stockholders for all corporations. Today, however, certificates are usually issued only by privately held corporations. Large corporations, with shares that are publicly traded on a stock exchange, keep stock ownership records as part of their required bookkeeping, either in written or electronic form. Rather than a traditional stock certificate, the owner receives a statement from the corporation or their broker verifying ownership of the shares.
Using corporate shares
When a corporation is formed, the articles of incorporation state the total number of shares the corporation is authorized to issue. Typically, some, but not all, authorized shares of stock are issued to each of the original owners. The number of shares each original owner receives is generally based upon that owner's financial contribution to starting the business. Such an initial issuance of stock is how a new corporation obtains the funds needed to get started.
Some of the authorized shares of stock are usually held in reserve by the corporation, to be used to fund later operations or expansion. If all of the authorized shares are distributed, no more shares can be issued without a vote of the shareholders.
For example, the articles of incorporation of Acme, Inc., authorizes 100,000 shares of stock. The corporation initially issues 25,000 shares to the original five owners. Two years later, the company needs to raise money for expansion, which it does by selling another 20,000 shares, some to original owners and some to new investors.
Using stock certificates
With corporations that used stock certificates, rather than bookkeeping entries, as proof of stock ownership, there was the risk that the certificate could be lost, destroyed, or stolen. This would require the stockholder to undergo a procedure of re-establishing the certificate by signing an affidavit of lost stock certificate. Such a potential problem is avoided with using bookkeeping records as proof of stock ownership.
Even if there is no legal requirement to issue physical stock certificates, investors may still like to have a certificate as physical evidence of their investment. Therefore, even if your corporation's official way of documenting stock ownership is by bookkeeping entries, you can still issue stock certificates.
Stock certificate forms may be obtained from various online sources and many office-supply stores. These are, in essence, fill-in-the-blank forms with fancy borders and lettering. To fill out a stock certificate, you fill in the name of the shareholder, the name of the corporation, the number of shares represented by the certificate, the date, and possibly an identification number. There is also a space for a corporate officer to sign on behalf of the corporation and to affix the corporate seal.
The best way for your corporation to distribute stock to investors depends on several factors, such as the laws of your state of incorporation, the articles of incorporation and by-laws, the size of your company, how easily you want investors to be able to trade their stock, and your method of bookkeeping. For more help deciding on these factors, you may want to consult a legal professional.
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