Understanding Share Transfer or Transfer of Shares
This article will help you understand all about share transfer and the procedure for the transfer of shares in a company.
With the economy changing, the ways of investing money have also changed. It was not long ago when we had many companies that were owned by just a single individual. Today, many companies are owned by a pool of individuals.
This article will help you understand all about share transfer and the procedure for the transfer of shares in a company.
Transfer of Shares
When a company is formed, the shares are allotted. After some time, shareholders will want to sell a part or all of their shares to someone else; this is called the transfer of shares in the company. But what exactly goes into this process?
What is transfer of shares?
There would be times where you would want to change the share structure of your company. This can be done by changing the existing proportion of shares between shareholders or adding a new shareholder. So, the transfer of shares in the company is the process of transferring existing shares from one person to another, either by selling or by gifting them.
When a person purchases or receives a company’s stock, they get a certificate that shares the details of the ownership of the shares, known as the stock certificate. So, when this person decides to transfer the shares to someone else, they would have to perform a transfer using a share transfer form.
Possible reasons for the transfer of shares
A share transfer takes place under many different conditions. For instance, when a shareholder leaves the company, they would have to transfer the shares to another shareholder. The same happens when a shareholder dies or retires. With this, it is important to know the process of the transfer.
Here’s a short summary of the procedure for transfer of shares:
- Step 1: Confirm your shareholdings: You need to confirm the number of shares you have, including the number of shares you want to give away and the number you want to keep.
- Step 2: Hold a Board Meeting: As per the board agreement, the share transfer has to be approved by the board before it can be done. So, hold a board meeting and get the action approved.
- Step 3: Fill the Share Transfer Form: It is the J30 form, a standard document used to transfer existing shares from one person to another. This form would hold the details of the seller or gifter of the shares, the receiver, number of shares, type of shares, and consideration paid. The shareholder selling the shares would then have to sign and date the form. If the shares are being transferred by the company and not an individual shareholder, then the director of the company would have to sign it.
- Step 4: Issue new share certificates: With the confirmed share structure in place, the company’s next step is to issue new share certificates detailing the shareholdings. These will also render any previous share certificates as effectively canceled.
Share Transfer Form
The share transfer form, which is also known as a share transfer instrument, is a standard document that is needed for the transfer of shares in a company. This document is used when a shareholder or the company wants to sell or gift their company shares to another person or company.
The document is simple, where it outlines the particulars of the party selling the shares, the particulars of the person receiving it, the number of shares to be transferred, the company whose shares are transferred, the cost of each share, etc. As per the law, a private company cannot directly transfer shares to a person, but an existing shareholder can do so. When the form is filled, the transferor and the transferee will sign the document.
With this, the company can then affix its common seal on the document. Or, in place of this, either two directors, or one director and one secretary would need to sign on the document. If either party is an organization, then the authorized representative of the organization needs to sign the form. This will act as the seal for the transaction and is an integral part of confirming the transfer of shares in the company. Once this has been done, the document is kept in the company’s records.
How To Transfer Shares From One Shareholder to Another Person?
The transfer of shares in the company seems to be the same for all companies, but we know that there are different types of business entities, and each has its own kind of structures and processes. Keeping this in mind, we have shared the process of the transfer of shares for each main kind of company:
#1 Transfer of shares in a Corporation
The shares in a corporation are freely transferable. Nonetheless, the Articles of Incorporation, the agreement between the shareholder, or the bylaws might place some reasonable restrictions on the transfer of shares. For being about to transfer shares, the shareholder would require the board members’ approval and the approval of all the other shareholders in the company. Once this is done, the share transfer form is filled in, and the new share certificate is issued accordingly to the person getting the shares.
When the corporation sells its shares, the corporation would have to pay tax on the income and gain at the corporate level. And there is no preferential tax rate for capital gains recognized by a corporation. The money obtained from the sale of the shares is taxed as a dividend. And if it is sold as a plan of liquidation, it is taxed as a capital gain.
However, if an individual shareholder is selling the shares, they would have to pay tax on the capital gains at the preferential individual tax rate.
#2 Transfer of shares in S corporation
S corporations are corporations for all non-tax purposes. And that is why the steps needed for the transfer of shares are normally the same as those in the C corporation. Once the company or the individual shareholder decides to transfer the shares, they would need The Board’s approval, and then they need to fill the share transfer form. With this, the new share certificate is issued, and the shares are transferred. Ensure that all these transactions are noted in the company’s records and the cap table.
Since S corporations are pass-through entities, the tax implications are different from a C corp. When the shares in a company are sold, the S corporation would have to pay tax on the capital gains at the corporate level. This is then passed out to the shareholders. And if the shareholders are individuals, the amount is then taxed at the preferential capital gains tax rate. Shareholders get a step-up in tax basis in their shares as a result of corporate gain recognition.
#3 Transfer of shares in LLC
An LLC is governed by an Operating Agreement created when it is formed. This agreement provides the details on how the transfer of shares would be done in the company. If you are a shareholder in the LLC, you would have signed the operating agreement as well. And even though the operating agreement should have the rules that define the transfer of shares in the company, the LLC can also have a buy-sell agreement for it separately. It would share details taking into consideration every situation possible that can lead to the transfer of shares.
With this said, the transfer of shares in an LLC is not so different from that of a corporation. The only difference is that the transfer is governed by the rules in the operating agreement or by a buy-sell agreement. Once the board has approved the share transfer, and the conditions as per the agreement are met, the share transfer form must be filled and signed. As soon as it is signed, the shares are handed to the transferee, and the stock certificate is issued. With this, the company also needs to record the transaction in the company’s records and the cap table.
Taxation for Transfer of Shares
Selling stocks can have consequences on your tax bill. If your stock transaction resulted in you making a profit, you would owe the government capital gains tax. And if your transactions had a capital loss, you can use the loss to reduce your income for the year. You also get the option to carry the loss to the next year so that you can offset any capital gain that you make.
Let us understand what capital gains are a bit more before we can talk about the taxation of the transfer of shares.
What is a capital gain?
Capital gain is the difference in the amount you paid for the shares from the amount you sold the shares. In fact, capital gains aren’t just used for stocks, but it is for any asset you sell and get paid more than you paid for it.
There are two kinds of capital gains, namely, short-term and long-term capital gains. Short-term capital gains are when you own the stock or asset for less than a year before selling it off. In this case, you are taxed at the same rate as your income. This means that the short-term gain tax rate is equal to the income tax rate for your bracket.
If you own the stock for more than a year, it is considered a long-term capital gain. In this case, you are taxed at a much lower rate than your income tax. As a matter of fact, in 2020, single taxpayers get to pay:
- 0% on long-term capital gains if their taxable income is below $40,000,
- 15% – if their income is between $40,000 and $441,450, and
- 20% – if their income is more than $441,450.
Take the help of your accountant or lawyer to know more about your tax bracket.
Now, the tax you pay also depends on what you are doing with the shares. There are two situations, both have been explained below in detail:
#1 Selling Shares
In general, the capital gains tax will have to be paid for when you sell or give for free an asset, such as shares. The tax applied to it would depend on your income and the total capital gains you made from the shares in that year.
#2 Transfer as Gift
There are situations where a shareholder wishes to give their own shares as a gift to someone else. And the good news here is that there is no capital gains tax on the shares that are offered as gifts to your spouse or civil partner. But there is a general rule that when an individual gifts a chargeable asset like a company’s shares, it is considered disposal. This gives rise to a chargeable gain in the same way just it happens during the transfer of shares in exchange for money.
Nonetheless, when you gift shares, the shares’ market value at the time of disposal is taken into account for the capital gains tax and inheritance tax purposes. The logic behind this is that the tax is imposed on the increase in the value of the shares during the time the person owned them, that is if the value of the shares has increased from the time they acquired them to the time they gave them away for free.
Imagine you get 5,000 shares at $0.10 per share. It is evident that the value of the shares would increase as the company grows. Let us say that the market value of the shares is now $2 per share. So, if you want to give away the complete 5,000 shares for free, they would be liable for capital gains tax. This would be calculated on the difference between the current market value of the shares ($2 * 5,000 = $10,000) and the acquisition value of the shares ($0.10 * 5,000 = $500). This means that the remaining amount of $9,500 would be subject to tax.
Transfer Shares on Eqvista
With all the above explained and now that you have understood everything, it is essential to record every transaction you make. Recording it means documenting the transaction in your cap table. And Eqvista is an advanced cap table software to help you record and manage all your equity transactions.
Before you begin, you will need to make sure that you have an account on Eqvista and have created your company account.
Step 1: Log into your account, select your company profile and from the dashboard, click on “Equities” under the “Securities” tab.
Here, click on the equity class from where the share transfer is about to take place. In this case, we select the option “Series B”.
Step 2: Once you do this, you will reach the next page, as below:
From here, select the certificate number of the shareholder whose shares are being transferred. In this case, we selected the option “SB-002”.
Step 3: This will take you to the page where you can see the details of this transaction. Next click on “Action” and then on “Transfer shares”.
There are two kinds of transfers that you can make. One is the partial transfer and one is the transfer of all shares. Here we chose partial transfer, and type in the transferee’s name.
Step 4: You will reach the next step where you need to add the number of shares that you want to transfer. Since it is a partial transfer, and the shareholder who is making the transfer has about 1,000,000 shares, we choose to make a transfer of 200,000 shares here.
You will also have to add the price of the share at the time of the transfer. In this case we add in the share price of $30, and press on Submit.
With this, the transaction would be complete, and you will be redirected to the page of the transferor shareholder.
Step 5: To see the transfer and its effect on the secondary transactions of your cap table, you need to click on “Cap table” from the left side menu and then on “Secondary transactions”. This will take you to the following page.
Here, click on the “Transfers” tab to see the transfer transaction as shown below.
And just like this, you can easily make the transfer of shares in the company through Eqvista. To know more about the Eqvista app and how to use it, check out our knowledge center or contact us today!