When Does a Company Need to Issue Stock Certificates?
07 August, 2017
A stock certificate is a legal document certifying ownership of a specific number of share or stock in a corporation. Stock certificates include information such as an identification number, the number of share owned, the date, a corporate seal, signatures, etc.
In the past, stock certificates were required when stock was issued by a corporation or transferred by a shareholder. It was essential when seeking to prove that the shareholder was entitled to dividends. Over the years the need for the actual stock certificates has diminished as business law has involved. Furthermore, businesses keep their records entirely electronically.
However, there are some instances when entities need to issue stock certificates.
When should a company issue stock certificates?
Nowadays, many companies issue a holding statement rather than stock certificates. From the legal point of view, laws vary slightly from state to state, but most states allow companies to opt out of issuing stock certificates. For example, if you set up a company in Delaware and you don't want to issue stock certificates, you will be required to include provisions in its articles of incorporation and bylaws for electronic recordkeeping. If the company doesn't include these provisions, the stock certificates must be issued.
On the other hand, entities still benefit from issuing stock certificates. Shareholders may feel more comfortable with stock certificates signifying their ownership. Therefore, it can help businesses to attract more investors. Additionally, the issuing of stock certificates can clearly denote the transfer rights, voting rights, and other rights and exclusions.
The company may issue a stock with any type of restriction attached to it. It is necessary it clearly states the restrictions, such as voting rights or transfer rights. The issued stock must include a written statement with the specific restriction and the transferee must be aware of this restriction. If the stock certificate doesn't clearly denote the restriction, it cannot be enforced against the transferee.
Although issuing stock certificates is no longer required by law in most states, it still in a corporation's best interest to do so. Issuing stock certificates will help ensure that the company is in compliance with the law, attract more investors, and allow the entity to have enforceable right and restrictions on its stocks.
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