Find out the core of corporate share structure for a Canadian small business owner. Learn how shares affect your business’s ownership, control, and taxation to grow your business strategically in sharing. Small business owners should make many critical decisions if they set up a business in Canada. Choosing the Corporate Share Structure is undoubtedly one of the most important ones. A solid grasp of shares and how they can affect the company’s growth, control and tax liability is very helpful.
Here is a guide to basic corporate structures in Canada for small business owners. Whether you’re forming your business for the first time or making adjustments to your existing structure, it is important to understand shares.
Let’s dwell on the idea of what ownership share is in a corporation. If you own shares, you own a portion of the company. In simple terms, shares are divided into two broad categories:
These are the most basic types of shares. Common shares give owners the right to vote in important company decisions. They don’t guarantee dividend payments. In case of favourable stock performance, shareholders may have someone to give them dividends, but if the company goes out of business, they are the last people to get paid after creditors.
Certain advantages exist to owning preferred shares. Preferred shareholders are usually paid dividends and receive priority if the company fails. But they may not be allowed to vote. Issued to investors who want steady returns without involvement in decision-making, these shares are not part of the company’s day-to-day operations.
The more of your corporation you control, the more shares you issue directly determine how much control you have. Most small business owners must consider how much control they want to retain. Let’s say you, instead, begin issuing more common shares to new investors, diluting your ownership and ‘losing’ (that is, temporarily or perpetually losing) a share of decision control.
For example, you can raise capital using preferred shares rather than issuing preferred shares, which would not give you voting power. Business owners who want to raise money and maintain day-to-day control of the business often use this strategy.
When you put on your business in Canada, you own a choice to make several share classes. There are no restrictions on or rights to each shared class. For instance, you could create a class of shares that gives voting rights but not dividends.
On the other hand, you may decide to make shares that entitle you to dividends but not voting rights. Here’s why creating different share classes matters:
These can vary based on the type of shares issued but generally include
A small business’s share structure can be well designed to yield big tax benefits to its owners. Income splitting is one of the most popular tax strategies. Here, you issue shares to family members, pay them dividends, and lower your tax burden.
Let’s say your spouse or adult children own shares and can receive dividend payments, which are taxed at their lower income tax rate. However, changes in the tax rules, including the Tax on Split Income, render this strategy less useful, so you should consult a tax professional if you are using it.
Some shares may also be eligible for the Lifetime Capital Gains Exemption (LCGE), which allows shareholders to sell shares, free of tax, for up to $971,190 (in 2024) as of writing. It’s important to contemplate when planning to sell or hand over your business later.
Setting up a share structure can feel daunting, but following a few simple steps can guide you through the process:
The first is to decide what type of corporation you want to be (e.g., private vs. public). This will affect your share structure.
Decide what kind of shares you’ll offer: common, preferred, or both. What shares were held by whom, and what rights did they have?
Determine how many shares you want to issue and to whom. As you issue more shares, you could potentially hand over more control.
Just make sure your corporate records properly document your share issues. It is seriously important for legal and tax purposes.
