Considerations for Incorporation: Share Structure

One of the most common issues we see when a client self-incorporates is a share structure that is not sufficient to support the growth of the company.One of the most common issues we see when a client self-incorporates is a share structure that is not sufficient to support the growth of the company.

What most people do not realize is that the share structure you implement on incorporation dictates what and how many shares you can issue.  The share structure cannot be easily changed after incorporation.  Often we see share structures listed in the following ways on self-incorporations:

  1. 100 Class A common voting shares;
  2. unlimited Class A common voting shares;
  3. unlimited Class A common voting shares and unlimited Class B common non-voting shares.

In the first example, if you only have 100 Class A common voting shares, you cannot issue any more than those 100 shares ever unless you amend the share structure in the corporation’s articles.

Unlimited Class A common voting shares is a more flexible structure but it still limits the corporation to issuing only one type of share.  This means that every shareholder added will have voting rights and some say in the corporation whether you want them to or not.

A share structure like the third example, at least gives the corporation the ability to issues both voting and non-voting share, so there can be “silent” shareholders.

Additionally, dividends must be issued by class of shares. If there is one class of share then the corporation must issue the same dividend to every member of that class.  For example, with only Class A shares, if you decide the dividend is $100 per share, all Class A shareholders receive that dividend.  You cannot issue individual dividends unless you have multiple classes of shares.  

Keep in mind that there are new rules with respect to income splitting between family members.  As of 2018, splitting your income by allocating dividends to your spouse or children will be taxed at the highest tax rate unless they fall under certain exceptions.  These exceptions include:

  1. A spouse, once the owner turns 65;
  2. Adults aged 25 or older who hold a 10% voting share in an non-professional corporation that earns less than 90% of its income from services;
  3. Adults 18 or older who averaged 20 hours of work in the business per week during the year or any of the 5 previous years.

If your intention is to incorporate just to take advantage of income splitting among family members, we suggest speaking with an accountant before incorporating.

We provide our incorporation clients with a share structure containing multiple share Classes and rights.  The structure is designed to serve a corporation now and for future growth.  We also provide a minute book containing all the resolutions, consents and share certificates required to be maintained under the Business Corporations Act.  The minute book is often missed by self-incorporations.

If you are considering incorporating, always speak with a lawyer.  Registry agents can incorporate for you but they cannot and will not provide any legal advice.  We can provide you with advice to allow you to incorporate properly from the beginning to meet the needs of the business, now and in the future.