To be specific, my wife and are equal partners in our limited company. On paper it says we have one share each. We now want to sell 10% of our company to a third party. How does that work in terms of the existing share status?
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From a naive voting perspective, less other changes, the third party is now equally powerful to you and your wife.– djechlinSep 29, 2017 at 15:46
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@djechlin True but only because with three partners it will always take two to form a majority unless one of them owns more than 50%. What does change is that a small majority will become a possibility when it comes to future votes. The past distribution meant that a small majority couldn't happen and decisions would need unanimity. If you have a contract that defines conditions where a decision requires a 2/3 majority the partner holding 10% will actually be less powerful than the other partners.– kasperdSep 30, 2017 at 18:02
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4 Answers
Simple: Do a stock split. Each 1 Ordinary share now = 100 Ordinary shares (or 100,000 or whatever you choose). Then sell 20 (or 20,000) of them to your third party.
(Stock splits are fairly routine occurrence. Apple for example has done several, most recently in 2014 when 1 share = 7 shares).
Alternatively you could go the route of creating a new share class with different rights, preferences etc. But this is more complicated.
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46Note that this is why issuing only 2 shares of stock is a bad idea. If they's issued 100 shares to begin with and each owned 50, issues like this wouldn't have come up. (So as to prevent one party from selling without the other's consent during/after divorce, they could write up a contract granting each other Right Of First Refusal when wanting to sell shares.)– RonJohnSep 27, 2017 at 12:43
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3Right of first refusal is no panacea, cref. Snopes situation where the ex-wife was going to sell her shares and the ex-husband couldn't afford the price she was offered by the third party.– stanniusSep 27, 2017 at 17:37
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5Seems like it'd be nice to pick a highly composite number of shares for this purpose? e.g. 60. Then you can divide by 2, 3, 4, 5, 6, 10, 12, 15, 20, 30... Sep 28, 2017 at 2:37
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6@FrancisDavey: Haha, I would find them scary too if that's what they called them ;) over here we just call them "simple fractions". :P Sep 28, 2017 at 7:52
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6@Mehrdad It's an unfortunate name. Maybe our teachers were in the pay of Big Decimal :-). Sep 28, 2017 at 7:54
There are 2 basic ways to have someone buy partial ownership of your company:
- They can buy shares that you already own. This means they will give cash to you personally, and that if you sold the shares for more than you bought them for, you will likely pay tax on that gain. [Splitting your stock, as referenced above, and then selling some of that stock will be a variation on this].
OR
- They can buy new shares directly from the company. This means they will give cash to the company, and that cash can be used by the company for additional investment. It is likely that there are no immediate tax consequences from this method. You may still need to do something like a stock split in order to have new shares offered to your partner not outnumber your own shares in votes.
If they buy shares that you already own, then their shares will have the same rights as yours (same voting rights, same dividend rights, etc.). If they buy shares newly created from the company, they could be either identical shares to what you already own, or they could be a new class of shares [you may need to adjust the articles of incorporation if you did not plan ahead with multiple share classes].
You really need to talk to a lawyer & tax accountant about this. There are a lot of questions you need to consider here. For example: do you want to use the money in the business, or would you rather have it personally? Are you concerned about losing some control of how the business is run? What are the short term and long-term tax consequences of each method? What does your new partner want in terms of their share class?
The answers to these questions will be highly valuable, and likely worth much more than the fees you will need to pay. At the very least, you will likely need a lawyer and accountant anyway to ensure the filings & taxes are done correctly, so better to involve them now, rather than later. There are many other situations to consider here, and an online forum is not the best place to get advice that might put you in a sticky legal situation later on.
answered Sep 27, 2017 at 12:36
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1Worth remembering that share transfers may attract SDRT whereas allotment of new shares by the company does not. It's also worth clarifying that in the second method, the shares are entirely new shares created by the company. Sep 28, 2017 at 6:50
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1The main difference is also who gets the money - the company or the sellers.– TomTomSep 28, 2017 at 9:53
Do a share split. Your initial 1 share each becomes 10 (or 100) shares each, then you can sell/gift/etc shares as needed.
You actually have a few options. First, you can do a share split and then sell an equal number of shares from both you and your wife to maintain parity. Second, you can have the company issue additional shares/convert shares and then have the company sell the appropriate percentage to the third party while the rest is distributed to you and your wife. Third, you can have the company issue a separate class of stock. For example there are companies that have voting stock and non-voting stock. Depending on your goal, you could just issue non-voting stock and sell that.
Best bet is to contact a lawyer who specializes in this type of work and have them recommend a course of action. One caveat that has not been mentioned is that what/how you do this will also depend on the type of corporation that you have created.
