What steps should you take to verify company ownership?
Not all companies have the same ownership structure and this can affect how you perform company due diligence.
Why should you verify company ownership, also known as proof of business?
The answer is simple. Verifying company ownership is required by law. Ignoring this crucial process can result in hefty penalties and fines.
As for why you need to follow company verification processes. The practice helps ensure the company you are partnering with is not using its financial portfolio to fund illegal activities.
So how do you perform company due diligence? The necessary steps depend on the company’s ownership structure.
Proving Sole Ownership of a Company
Sole ownership is when a company has a single owner. The owner is clearly listed on all financial documents.
Occasionally the sole owner may use a DBA (doing business as) name. This means the name listed as the business owner is different from their legal name.
Regardless of whether a DBA is used, verifying sole ownership is a relatively simple process.
The business owner submits tax statements and when applicable, a copy of the DBA.
Searching through public tax and business records will help you verify the information.
Proving Corporate Ownership
Verifying corporate ownership is a little different and the steps vary depending on whether it is an S or C corporation.
S corporations are structured similarly to sole proprietorships. The business owner uses their tax ID to claim the company’s profits and losses.
To verify the proof of business, the corporation’s owner will need to provide you with a copy of their recent tax returns and articles of incorporation. Make sure any stock information is also included in the submitted document package.
With a C corporation, the tax ID is different from the owner’s personal one. To verify the business, you will need stock and share certificates, along with documentation pertaining to contract agreements and financial contributions.
You can verify the provided information through government databases.
Proving Limited Liability Company Ownership
LLCs (limited liability corporations) often use personal tax IDs but reduce their liability by creating a formal business. Some LLCs use an EIN number instead of a tax ID.
However, the documents you need for verification are the same. You need to verify the articles of organization. The document will list all establishing business members.
Depending on the number of members, the verification process can take some time.
What if the Business Does Not Have Certificates?
Technically, all businesses should have certificates. However, loopholes exist which some companies take advantage of.
You can still verify company ownership by requesting and verifying the following documents.
Business emails and meeting notes, along with IRS from K-1. Resolutions from the business and additional records can also help you verify ownership.
Verifying proof of ownership can be frustrating and time-consuming, regardless of the company’s size. However, failing to do so can place your business at risk. The fines and penalties can be severe and it can also ruin your business’s reputation.