Issuing shares of stock or membership interest certificates

Issuing shares of stock or membership interest certificates

Shares of stock in a corporation or membership interests in an LLC are evidence of ownership and control of the company. They come in the form of certificates and are generally issued in exchange for cash, services or property. Certificates can also be issued in exchange for intellectual property—designs, formulas, copyrights, trademarks, patents and the like—or for real property or tangible assets.

The issuance of certificates is authorized by a corporate resolution (either a consent resolution entered into the corporate book, or as part of the minutes of a meeting).

Issuing certificates (be they for corporate stock or LLC membership interests) is an important part of the process of capitalizing your corporation for two reasons. First, being undercapitalized is grounds for piercing the corporate veil in some states and getting at the shareholder’s personal assets. So you want to put enough money in the Company and issue certificates for that injection of capital. Secondly, the failure to issue stock in and of itself is grounds for piercing the corporate veil in some states. So you want to do it for your immediate protection.

Keeping records of certificates issued in a ledger is equally important. Not only do you need to know for your own purposes, but you need to know under the law. Corporate stock and LLC membership interests are securities, meaning they are governed by the sometimes very restrictive state and federal securities laws. Issuing certificates with abandon can lead to serious legal problems. Think of the Mel Brooks movie “The Producers” where 500% of the shares to the musical “Springtime for Hitler” were sold. The musical was going to be so bad that no one would notice the five times over issuance of shares. And guess what happened?... In real life, the securities regulators don’t have a healthy sense of humor about such activities.

Original publish date: February 27, 2013

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