Posted 29 September 2009 - 03:25 PM
ok - since the rather straight foward capitalization of a private company with most likely nominal issued capital and the balance via shareholder loans have now extended to 2 pages, will add my 2 cents.
the main advantage of capitalizing the company via shareholder loans is future cash flows can be extracted by the shareholder without the requirement of too much professional help, simple bookkeeping should be able to track the current balance, other point to consider - in most provinces a shareholder loan can be secured against the company's assets, generally a lawyer is needed to assist with setting up and registering the security agreement.
If your bent on capitalizing the advances as shares, points to consider:
- not as simple to extract funds from future cash flows, either a dividend is required to declared which results in a income inclusion to the shareholder, or the shares must be redeemed, subject to the provincial corporation tests for liquidity, and fees will be paid to the lawyer to prepare resolutions, cancel certificates and update the central securities register.
- not many provincial or federal corporation business acts still have par value shares (British Columbia does) so its diffcult to have a contributed surplus, but lets say you do have a contributed surplus, well heads up - contributed surplus generally does not have the same paid up capital for tax purposes as shown for accounting and the redemption thereof may create a taxable event under 84(3). Before redeeming contributed surplus, generally you have to increase the par value of the shares, in certain provinces a simple directors resolution will suffice in other provinces court approval is required. It is considerably more complex in removing your original investment capitalized with shares presumably paid for with after tax dollars than with a shareholders loan.
The investment in shares cannot be secured against the assets of the Company.
My 2 cents