One of the first decisions you will need to make when you decide to incorporate your business in Canada is about the content of your share capital. The minimum required by law is that it must contain common shares. After that, you can tweak the description of the legal rights pertaining to other share classes in several different ways to better suit your business. Imagination is essentially your only limitation.
In Canada, corporations can be created at the federal level under the Canada Business Corporations Act or by virtue of provincial legislation. While every law has slight variations, all of them share basic rules dealing with share capital. One of these is that the capital must include common shares. Common shares must have the right to vote, the right to receive dividends, and the right to receive the remaining property of the corporation after it is dissolved. Basically, common shareholders are the owners of the company and receive whatever profits are left after everyone else has been paid. Preferred shares have modified versions of the basic rights attached to common shares. In other words, any share that is not a common share is a preferred share.
The Right to Vote
A frequent type of preferred share is one where you modify the right to vote. For example, if you want to transfer your business to your family but want to retain ultimate control in the decision-making process, you could create a class of shares that is entitled to 100 votes per share, ensuring that you have the majority of votes until you have been fully paid out. Multiple voting shares are used in both private companies and public ones. For example, Bombardier Inc has both type A and type B shares that are equal in every respect, except that type A has 10 votes per share and type B has one vote per share. The type A shares are mostly owned by the founding family. It is also frequent, and legal, to find preferred shares that have no right to vote at all. These shares are usually used for financing purposes.
The Right to Dividends
You can also modify the right to receive dividends. For example, you can use a fixed annual percentage for a category of shares that you will use for financing. Guaranteeing a 7% dividend could entice an investor to buy shares. These financing shares are akin to loans but may offer more flexibility than traditional bank financing. You can have as many classes of financing shares as you like, but be sure to clarify their order of priority for payment of dividends.
The Right to the Company’s Assets
Upon dissolution of the company, the common shareholders have the basic right to the company’s assets once everyone else has been paid. It is possible to differentiate between preferred shareholders as to who gets paid first. In practice, financing shares are often the first to be paid, thus granting more security to the shareholders of that class. There are several variations to a share capital that can be made. It is fairly typical in any new corporation to put in place seven or eight classes of the most “popular” shares even if only common shares are issued. This way, as the company grows, the share capital doesn’t need to be modified, which is a fairly complex process.