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    I am buying shares from a sole shareholder of a corporation. Should the present owner issue shares from the treasury or from his own name? What is the difference?
    Posted: 2012-10-23 05:00:38

    There is a big difference between the issue of shares from the treasury and transferring from an existing shareholder. This affects the bookkeeping of the company as to how you record the amount received from the purchaser of the shares and this has implications for the capital gains tax.

    Most companies today have unlimited authorized share capital, which means that you can issue as many shares as you want from the treasury of the company. When shares are issued from the treasury, they are new shares and the total number that is issued to the shareholders determines the proportion of the company that you will own. It is proportion and not the actual number that determines your right to have dividend and vote in the shareholderÂ’s meetings.

    For example, if the present shareholder has 100 shares and you issue new 100 shares from the treasury, you have a total of 200 issued shares and you and the previous shareholder are then equal shareholders in the company.

    Shares issued from the treasury have a cost base of the amount for which they are issued. If the shares were issued for a dollar each, then the subscribed capital is $100 and the company books will reflect a capital of $100 as an asset of the company.

    If, on the other hand, you buy shares from the existing owner, and you want to be equal partners with the present shareholder, then the existing shareholder will have to transfer 50 of the total 100 shares issued to him. That would leave each with 50 shares and you are still an equal shareholder with the previous owner and are entitled to vote at the shareholderÂ’s meeting on an equal footing. $50 which you give him goes into his pocket and not recorded in the company accounts.

    If you have the shares transferred from the existing shareholder, you must pay capital gains tax if the value for which you buy is higher than the amount for which the vendor obtained his shares.

    It is important to seek advice from an accountant and the lawyer in this type of a transaction. The accountant will usually advise on the capital gains tax matter and the lawyer will prepare the appropriate resolutions to carry out the intent of the new shareholder. Ideally, there should be an independent lawyer acting for the purchaser of the shares who will check into the liens and other matters on the purchase.

    Mr. Jay Chauhan has more than 30 years of experience practicing Commercial law, Family law, Immigration law, Wills and Estates, and Litigation. Mr. Jay Chauhan earned degrees, including a Bachelor of Science from the London School of Economics in England; a Barrister-at-Law at Lincoln's Inn in England; a Master of Economics at the Berlin University in Germany; and a Bachelor of Laws at Osgoode Hall in Ontario, Canada. He was called to the Bar in Ontario in 1972, England in 1965, and admitted as an Advocate in the State of Gujarat, India in 1982. You can learn more about Mr. Chauhan by visiting his website at
    or reading his bio.

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