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When first incorporated, I created 100,000 company shares worth $1 each. What does this mean? Does the value mean anything? Because I just started, no capital was paid.

Do I also have to pay Capital Gain Tax if my company increases in value to say $1,000,000 (a tax on $900,000)?

  • What type of corporation is it (S or C)? Are you the only shareholder? – Ben Miller - Reinstate Monica Sep 3 at 10:39
  • Its a Private Corporation (Proprietary Limited). There was me and my wife as share holder. – Anthony Sep 3 at 10:47
  • Are those shares paid-up shares? Are they issued shares? Did the shareholders buy them at the nominal value and transfer actual money for them into the bank account of the company? – RedGrittyBrick Sep 3 at 12:08
  • No there were no paid up capital. Just shares created. – Anthony Sep 3 at 12:11
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    Then those shares are purely nominal unissued shares or were acquired at a market value of zero for capital gains tax calculations. – RedGrittyBrick Sep 4 at 12:13
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There’s the notion of share capital and a separate notion of authorised share capital (which, confusingly, isn’t necessarily share capital).

Share capital consists of all funds raised by a company in exchange for shares of either common or preferred shares of stock. - investopedia

Authorized share capital is the number of stock units (shares) that a company can issue as stated in its memorandum of association or its articles of incorporation. Authorized share capital is often not fully used by management in order to leave room for future issuance of additional stock in case the company needs to raise capital quickly. - investopedia

If your 100,000 shares were simply authorised but not issued, it means you can issue up to that many shares. How many shares you actually issue is a separate matter.

If you issued all the 100,000 shares to yourself at $1 per share, you personally would have bought that many shares. The $100,000 could be funded by cash. If you didn’t pay for the shares, you’d owe the company $100,000.

Capital gains are only calculated when you sell, and is the difference between what you paid on purchase and what you got back on the sale. The price could go up and down, but unless you are obliged to (or perhaps elect to) revalue the asset to the prevailing market price, you have not made any capital gain or loss until you actually sell.

Disclaimer: I am not a tax, finance or law professional and the above is not professional advice of any kind. Please seek professional advice where appropriate.

  • Makes sense, so basically I now owe the company $100,000!!. Woopsie. I should've set the value to ZERO at that time. – Anthony Sep 3 at 12:05
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    @Anthony Get some professional advice on this, but you might be able to fix this by selling most of the shares back to the company (keep one or two shares so that you’re still a shareholder), then restructure the shares the way you think best. – Lawrence Sep 3 at 13:27
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You only pay taxes on capital gains when they are "realized", which usually means that you owned shares in the company (which you seem to now) and later sell them for a profit (which you haven't done).

When the value of your company goes up, you have unrealized capital gains. You are wealthier, in a sense, but you can't do anything with this wealth until you sell some of your shares to get money to buy something else. It is only when you sell that you owe taxes. It is the same as when you buy stock of a public company on the stock market.

For the current value of your company, that is kind of fuzzy. You can't create value out of nothing by just creating a company, but presumably your ideas and business plan have some kind of value. The value of your company can be determined by what investors and other people are willing to pay to own shares of your company.

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    Thank you for the reply. Just that when I incorporated the company (I used an online service), it set the share price as $1 per share. So I'm confused what this value represent. If I would've set it to $100000 per share I would not have to pay capital gain ever again. – Anthony Sep 3 at 11:16
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    @Anthony No, share doesn't work that way. – mootmoot Sep 3 at 11:37
  • @Anthony, no, the starting point for your capital gains is $0 per share. The starting point is what you paid for them, and you didn't pay anything for them! (other than filing fees and stuff like that, but that doesn't count) – gaefan Sep 3 at 12:09
  • Thanks, you're answer is spot on! – Anthony Sep 3 at 13:39
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If you created a limited company, liability is limited by the share capital. The share capital is $100,000. If your company goes bankrupt with $250,000 debt then it is liable up to $100,000 and share holders like you who have shares but haven’t paid for them yet have to pay for their shares now.

Similar if the company gives you a loan, when the company goes bankrupt you have to repay the loan so the company can pay its debts.

If that is your situation, 1000 shares might have been wiser.

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It seems you are confusing with a public stock(public shares) investment with company ownership. A share is just a fraction of ownership representation. For more details, you should read the definition of shares. Also, you must know the difference between share capital and paid-up capital.

Say you try to registered 100,000 companies each with a super cool name, and intended to make a profit from the registered company name by selling them. In Australia, registered a cheap sole-proprietor will cost you $36. That will cost you at least $3,600,000.

Imagine you are able to sell your $1 representation company stock to a lot of people (or corporations) for $100, the real capital gains from each of your $1 is NOT

$100 - $1 = $99

but

$100 (sales) - $36 (cost) - $1 (registered capital) = $63. 

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