Area of Law: Business Law
Answer # 0250
Transfer of sharesRegion: Ontario Answer # 0250
Most small corporations and family run businesses are privately held. A privately-held company can sell shares without issuing a prospectus as required by provincial securities laws. This exemption is available to private companies that:
do not have more than 50 shareholders (apart from current and former employees),
have restrictions on share transfers, which are contained in the corporation’s articles or by-laws, or a shareholders agreement, and
have distributed shares only to identified classes of investors who are not considered the public, such as existing shareholders, directors, officers, family members and employees.
Buying or selling shares in a public corporation is not discussed here. Here we will discuss the transfer of shares in privately held corporations.
Benefits of transferring shares in a private corporation
Change of ownership
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 an individual or an entity such as a corporation or a partnership.
Tax implications when transferring shares
If a shareholder wants to income split with family members for tax purposes, they may be able to do so by transferring some of their shares. The rules surrounding the ability to income-split with family members have undergone changes over the years limiting this option.
Lifetime Capital Gains Exemption (LCGE)
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 increased limit applies to all individuals, even those who have previously used the LCGE.
For more information, refer to ‘Tax implications of transferring shares‘.
Transferring shares in a private corporation
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 more information, refer to ‘Restrictions on transfer of shares’.
It is advisable to review the Articles of Incorporation, and 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. For more information, refer to ‘Determining price of shares‘.
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. For more information, refer to ‘Effects of transferring shares‘.
You now haveoptions: