OK – so you’ve decided to incorporate (or maybe you already have) and you’re starting to work with your accountant and lawyer to set up your share structure and it’s like they’re talking an entirely different language. “Dividends”, ”Preference”, “Non-Voting”, “Cumulative”. What does it all mean?
Different types of shares can carry a large variety of characteristics. These can be mixed and matched in many different combinations to achieve the goals that you and your professional support team designate.
Shares are generally divided into two main types: Common and Preferred.
Common shares generally have a claim on the accumulated historical earnings of the company (commonly referred to as Retained Earnings) after all expenses and other claims have been satisfied, including those of the Preferred Shareholders. They are entitled to the rewards of owning the business and generally bear the risk of it too. This is likely what you will be issued as the owner of a brand-new company.
Preferred Shares are used in small companies for more advanced tax planning when it’s desirable to give access to the earnings of the company to parties other than the primary owner for income splitting or transitioning the business from one generation to another.
Either type of share can have any combination of these common characteristics:
Voting rights – this determines the control of the company. Shares can be non-voting (no say in the control of the company), full voting (one vote per share owned), or super-voting (multiple votes per share owned.)
Retractable – the company call recall the shares under specific conditions by paying a specified amount.
Redeemable – the shareholder can return the shares in exchange for other shares or a specified amount of cash under certain conditions.
Dividend Entitlement – Preferred shares often carry a prescribed dividend rate. The company may have the option to not pay the dividend should the need arise. If the entitlement carries forward to the following year (when the company will owe twice as much) then the dividend is said to be cumulative, if not, then the dividend is non-cumulative.
Par or Redemption Value – often used in advanced tax-planning strategies to facilitate the orderly removal of funds from the company over time.
These characteristics can be used in any number of different combinations based on your individual situation. Thoughtful planning for long-term eventualities during the incorporation process can save the expense of redefining your share structure later.
Working with your Chartered Accountant and lawyer will ensure you get the structure best suited for your venture – new or existing.
If you have any questions about shares or other parts of your business I would love to talk to you.