Area of Law: Business Law
Answer Number: 0250
Transfer of sharesRegion: Ontario Answer Number: 0250
Most small corporations and family run corporations are privately held. Private corporations are those corporations that have 50 shareholders or less and whose shares are not offered to the public. Buying or selling shares in a public corporation is not discussed here. Here we will discuss the transfer of shares in privately held corporations.
One of the benefits of the corporate form of business is that the ownership of the corporation can be easily transferred by the purchase and sale of shares. If shareholders of a privately held corporation do not want to own a part of the corporation any longer, their shares can be sold to someone else including another corporation or a partnership. If a shareholder wants to income split with family members for tax purposes, he or she will be able to do so by transferring their shares. If you are an owner of a privately held corporation and you want to sell or transfer your ownership, there are several things to consider.
1. Restrictions on the transfer of shares
Before you transfer or sell shares, you must make sure that you follow any rules that are set out in the Articles of Incorporation and in the corporate by-laws. There may be restrictions on who can buy or sell shares, or on how many shares can be transferred. For a privately owned corporation, the Articles of Incorporation usually require that the other shareholders agree to the transfer of shares. It is also common that the shareholders of the corporation will have to pass a resolution that approves the transfer of shares. This is often the case because with most privately held corporations, the shareholders also act as directors and officers of the company, and they want to have a say about who they are going to do business with and work with.
You should review the Articles of Incorporation, or contact a lawyer to help you determine what restrictions apply to your situation.
2. Price of the shares
Also before selling or buying shares, the price will have to be determined. Unlike the shares of a public corporation where the price is determined in the stock market and readily available to the public, the price of shares for a privately held corporation is determined by the shareholders. There is no one formula for determining the price of shares. If you have a shareholders agreement, the formula to be used for your corporation may be found there. A common formula found in shareholder agreements is called a buy-sell provision, or a shotgun clause. Such clauses provide that if one shareholder no longer wishes to be in business with the other shareholders, he or she will offer to buy the shares of the other shareholders, or sell his or her shares to them, for a set price.
If no formula or price has been put in place, you should consult a lawyer, a business valuator or an accountant for help.
3. Effect of transferring shares
Transferring shares does not change or nullify the legal structure of the corporation. However, in many privately held corporations, the owners of the corporation also take an active role in running the day-to-day affairs of the business, and if a shareholder leaves the business, then there may be some significant changes in the way that the business is run.
4. Lifetime capital gains exemption
Also, there will be tax implications when transferring shares. If the shares qualify as qualified small business corporation shares, the seller will be able to take advantage of any unused portion of the lifetime capital gain exemption (LCGE). The 2017 LCGE was $835,716. The current 2018 LCGE limit is $848,252. The increased limit applies to all individuals, even those who have previously used the LCGE.
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