Distributing Business Ownership Interests
How to Distribute Ownership to Founders of a Business
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Table of ContentsWhat formal steps should the corporate board take with regard to issuing corporate equity?What formal steps should the members of a partnership or LLC take with regard to issuing business equity?
What formal steps should the corporate board take with regard to issuing corporate equity?
During the initial meeting, the board of directors generally issues Founders Restricted Stock to the company founders. This is a form of common stock that is expressly restricted from resale by the founders.
The issuance is done through purchase agreements or subscription agreements. The purchase agreement may contain standard terms by which the stock vests in the founders over a period of time (i.e., the restrictions will lapse a little each year).
When issuing equity, the corporation should prepare the following documents:
- Stock Certificates and Receipts for the receiving founders,
- Memoranda memorializing the IRC Section 83(b) tax elections of each founder;
- All federal and state-required securities filings for stock issuances to founders (generally not applicable for issuance to the founders); and
- Any stock option or issuance plans and agreements.
Preparing stock issuance plans with vesting rights or stock option agreements can be quite complicated.
It is advisable to consult a business attorney when drafting these documents.
What formal steps should the members of a partnership or LLC take with regard to issuing business equity?
In a business, the owners or directors issue an ownership interest in the business in exchange for some value.
In a partnership or LLC, the partners or members must vote to grant ownership interest in the business entity to a new partner or member.
Ownership interest in the partnership is generally recorded in the partnership agreement.
There are no individual documents (such as shares of stock) evidencing ownership to be distributed to the new partner.
In an LLC, ownership is generally recorded in the operating agreement and represented as an ownership unit. This unit may be physically distributed (similar to shares of stock) to the members.
Often times, however, the LLC does not create certificates evidencing ownership; rather, evidence of ownership is maintained solely within the operating agreement.
Within both the partnership and the LLC, the governing documents will indicate the voting procedure and requirements for issuing new business equity.