When Does Your Startup Need to Issue Stock Certificates?
A stock certificate is a physical piece of paper that signifies that a person has an ownership in a company. A stock certificate should specify the number of shares that are being issued to or transferred to the holder of the certificate, the date of issuance, an identification number for the certificate, a corporate seal, and the signatures for those who have the authority to issue or transfer the stock. Stock certificates used to be a requirement when stock was issued by a corporation or transferred by a shareholder; however, the need for the actual stock certificate has diminished over the years as business law has evolved. Still, however, there are some instances when companies need to issue stock certificates.
When Should a Company Issue Stock Certificates?
The ability of a shareholder to produce a stock certificate used to be essential when seeking to prove that the shareholder was entitled to dividends or that a portion of stock has been transferred to the shareholder. The burden of being able to produce a stock certificate to receive dividends changed when shareholders began to be registered as such. Furthermore, recordkeeping for corporations has changed to being almost entirely electronic, diminishing the need to use stock certificates. Because the need to issue stock certificates is not as great as it used to be, a number of businesses now issue a holding statement rather than stock certificates.
Laws regarding when stock certificates must be issued vary slightly from state to state, however, most states allow corporations to opt out of issuing stock certificates. In Delaware, for example, if a company does not want to issue stock certificates, the company must include provisions in its articles of incorporation and bylaws for electronic recordkeeping. If these provisions are not included, the stock certificates must be issued.
Companies still benefit, however, from issuing stock certificates. Many shareholders feel more comfortable with a stock certificate that signifies their ownership of a corporation. Thus, the issuing stock certificates can help a company attract more investors. Moreover, when a company issues stock certificates it can clearly denote the voting rights, transfer rights, and other rights and exclusions the owner of the stock is entitled to in order to ensure their enforceability.
When a stock is issued with any type of restriction attached to it, such as restrictions on transfer or voting rights, it is important that they are issued clearly stating the restrictions. Thus, when restricted stock is issued, the stock certificate that accompanies the issued stock must include a written statement that clearly states the restriction placed on the stock. This statement is necessary to prove that the transferee of the stock is aware of the restriction that is placed on it. Without a stock certificate that clearly denotes the restriction, the restriction cannot be enforced against a transferee since he or she is not aware of the restriction that has been placed on the stock.
Thus, although issuing stock certificates is no longer required by law, it is still in a company’s best interest to do so. This will help ensure that the company is in compliance with the laws of the state, help the company attract more investors, and allow the company to have enforceable rights and restrictions on its stock.