Written by: Suzanne Cody CPA, CGA Senior Partner
Have you set up your shares? One of the most important things you need to do when creating a new corporation, in addition to preparing Articles of Incorporation, is to set up share classes.
Do you really own your corporation? Unless it is restricted by its articles, a corporation has the same role in carrying on a business as a person. A corporation is a separate legal entity from anyone else, even yourself. Ownership of a corporation is established through its issued shares, which entitle one or more persons to the rights needed to run the company.
Issuing and paying for and these shares is important but quite often initially overlooked. The main repercussion of not having shares issued and on the books is that the corporation could be deemed not to exist. This could have serious tax consequences to the individual(s) involved with the formation of the corporation.
It may seem a bit daunting but with some sound legal advice, setting up shares for a new corporation doesn’t need to be complicated. Legally, at a minimum, a small, non-reporting (not listed on the stock market) corporation has to have a single share class issued. This class is referred to as Common Voting Shares. We’ll call them Class ‘A’ shares. These shares give their owners the rights to receive dividends, vote at shareholders meetings, and to receive any property left in the corporation when it is dissolved. It is quite common to have a single shareholder, giving that person complete control over the corporation.
Common Shares can be issued as a single class or with multiple classes. But, if you only need one class of shares to set up your corporation, why would you want to issue more?
There may be additional people that you want to have owing shares in your corporation but you may not want them to have the right to vote. This is the perfect scenario to set up Class ‘B’ shares. Theses shares would be perfect for encouraging your employees to become more vested in your corporation or to provide your spouse or children with some ownership without being able to exercise control. These types of shares are referred to as Non-Voting Common Shares. They provide the ability to pay dividends and have a place in line should your corporation be dissolved. There are tax guidelines surrounding the payment of dividends to family members (referred to as ‘income sprinkling’). Before paying out dividends it would be wise to consult your accountant.
Do you need to raise capital? That’s what Preferred Shares can be used for. Setting up Class ‘C’ Preferred shares provides the vehicle for an investor to contribute funds to your corporation via a share purchase. They can have rights attached to them to permit dividends to be paid at a set amount. They are structured to offer their shareholders an advantage over shareholders that hold Common Shares These shareholders are first in line after any creditors to be reimbursed if the corporation is dissolved. These shares, like Common shares, can be either voting or non-voting.
Finally, to provide you with future flexibility, it would be a good idea to keep some of your shares from each class unissued. These shares would remain in your Treasury and make it easier to permit new shareholders to join the corporation later on. For example, if there are two shareholders and only two shares issued, you will not have any to sell to anyone else.