Evidencing Ownership in a Corporation – Nothing beats a Share Certificate
There may come a time when you have to prove what, if anything, you own of that small business corporation. Once a relationship with business partners goes sour, your fellow business owners may dispute your exact percentage of ownership, short-change you on the distribution of profits, or you may want to sue them for dissolution of the corporation or force a buyout, which requires certain percentages of share ownership.
Let me tell you in all caps: NOTHING BEATS A SHARE CERTIFICATE .
A share certificate issued by the corporation is solid proof (legalese: “prima facie” evidence) that you own a piece of the corporation and how much of that piece you own. See Business Corporation Law 624(f).
If your startup corporation follows proper coperate formalities, the issuance of share certificates should be a routine step during the formation process. When ownership changes, a change in the records of the corporation is similarly painless.
Still, in reality, many small business owners don’t pay much attention to such formalities. Another often encountered situation is that the business owners misrepresent share ownership for the purpose of getting a better loan or qualifying for certain licenses (for example, a liquor license). Or a business owner might fudge his ownership in the context of divorce proceedings. All of the above may muddy the waters when trying to show actual share ownership.
Fortunately, not all is lost when you do not have a share certificate issued to your name.
Not having a share certificate does not necessarily mean that you do not own part of the corporation. New York Courts know how many small businesses operate and have long held that evidence other than a share certificate may prove share ownership.
Courts may look at tax returns, actual financial contributions, liquor license applications, agreements, testimony of the parties involved or third parties. Anything that can show that you owned part of the business.
But be aware, if you are the person bringing the claim, in most cases, you have the burden of proving that you in fact own shares in the corporation. The burden of proof means that your version of the facts has to be more believable than your opponent’s version of the facts. Which story is more credible? If both stories are equally believable, you lose. If your opponent is a good liar or has other evidence against you, it may not look so good for you. Finally, having to go through the process of proving share ownership by other means adds substantial cost to any court proceeding.