The Importance of Ownership Documents

November 23, 2016

Why Ownership Documents Matter?

There are a variety of business ownerships types. From sole proprietor to corporations and everything in between, defining the ownership of your company means operating the business as the owners see fit. Everything from signing legally binding contracts to hiring and firing employees can be different based on your ownership type.

Depending on where you register your company, you may even have tax breaks for the type of company you have. Keeping those documents in a safe place for ease of access is just as important as keeping your tax and accounting records in case of audit. You never know when your ownership could be called into question, or when proof of ownership is needed for a business venture. Let’s look at some of the most common types of ownership and the documents you should have on file.

Sole Proprietorship

Sole proprietorship means there is one owner. The business operates solely for their benefit. As one of the easiest business forms to create, there is no distinction between you individually or the business. If you choose to operate the business under a different name you will likely need to file a DBA (Doing Business As). This is also referred to as an assumed name or trade name, with the Secretary of State. Once you file as a DBA, you have the document you need for proof of ownership. Make sure you save the full application along with the state’s returned certificate of filing.

Limited Liability Company (LLC)

The owners of a LLC are called members. An LLC can have one or multiple members. Your LLC must have a name and Articles of Formation/Organization must be filed and noted with the Secretary of State. Most assume that by listing all the members on their Articles they have defined ownership. Not so! Unlike a sole proprietorship, all you have done is reserved your business name as a legal entity with the state. To define ownership it’s recommended that you create an operating agreement.

The operating agreement specifies what members are and aren’t allowed to do. It should list what happens with profits and losses, member’s rights and most importantly a percentage of interest or units of ownership.

All members should sign this document. If you choose to add or remove members at a later date, you can add a signed addendum showing the updated member unit breakdown.
If your business has been around for a while and you have already filed federal taxes you can sometimes use your Schedule K-1 or Schedule C as a starting point as long all the members listed also show the unit percentage breakdown. Unit percentages should always total up to 100 percent. Keep your member operating agreement in safe and easy-to-access location in case you need it for any business transactions. Often insurance, financial and tax companies will request this document. A best practice would be to make sure that all members have their own copy.

Corporations (C and S)

The primary difference between a C-Corp and an S- Corp has to do with tax filings. However, both entities rely on similarly structured ownership documents. A corporation needs to file articles of incorporation with the Secretary of State to reserve their name as a legal entity. Each state has different requirements in regards to filing articles of incorporation so be sure to check to make sure your business is in compliance.

The owners of a corporation are called shareholders and there can be any number of shareholders in a corporation. The company structure is defined in a number of documents, all of which are important in establishing ownership. The bylaws list out responsibilities and rules for the shareholders. Most corporations also have directors or officers which are commonly some or all of the shareholders. The bylaws clearly state which director or officer has what responsibilities and are usually combined with a shareholder control agreement, shareholder register and share certificates.

Shareholder Control Agreement

The shareholder control agreement is viewed as a contract between the shareholders and the company. It lists obligations and directives on how the company is operated.

The shareholder register lists all shareholders and the percentage of ownership in the corporation. Shareholder certificates are issued to each shareholder. The register should reflect all of the ownership percentage breakdowns listing the total number of share certificates issued. This should match the total number of shares available for issue mentioned in the bylaws or shareholder control agreement.

It sounds complicated, but it proves to all how much ownership you may have in the corporation. It clearly provides directive on it if you’re able to bind legal contracts on behalf of the company or if all shareholders must have input. Having these documents easily accessible will alleviate stress when they are required to move forward in a business venture.

Recommendation

When dealing with multiple business partners or entities it’s always recommended that you consult a legal professional to assist you in setting up your company ownership documents. Once you’re established, keep those documents handy. Scan them or get a PDF version from your lawyer and save it in a place you can quickly retrieve if necessary. As always staying on track with record keeping will allow you and your business, regardless of the type of ownership, to focus on your company’s day-to-day needs.

Author: Angelique C.