When incorporating a business in Ontario, one crucial aspect to consider is the share structure of the corporation. The share structure determines the ownership rights, voting power, and distribution of profits among the shareholders. It is essential to carefully plan and structure the shares to meet the specific needs and goals of the business. In this blog post, we will explore some key considerations for share structure in an Ontario corporation.
- Types of Shares: In Ontario, corporations have the flexibility to issue different classes of shares, such as common shares, preferred shares, and non-voting shares. Each class of shares can have unique rights and restrictions. Common shares typically carry voting rights and participation in the profits and assets of the corporation. Preferred shares may have preferential treatment in terms of dividends or liquidation proceeds. Non-voting shares, as the name suggests, do not carry voting rights but may still have economic rights. Choosing the appropriate types of shares depends on the objectives and requirements of the shareholders.
- Shareholder Rights and Restrictions: Consideration should be given to the rights and restrictions associated with each class of shares. These can include voting rights, rights to dividends, rights to participate in the distribution of assets upon liquidation, and rights to receive financial information. It is important to clearly define and document these rights and restrictions in the corporation’s articles of incorporation and shareholders’ agreements to avoid disputes and ensure transparency.
- Founders’ Equity: When starting a corporation, founders typically allocate shares among themselves to reflect their respective ownership interests. It is important to carefully consider the distribution of shares and any vesting schedules or restrictions. Vesting schedules can help ensure that founders earn their ownership rights over time, providing incentives for continued commitment and alignment. Founders should also discuss and agree upon any buyback provisions or transfer restrictions in the event of a founder’s departure.
- Future Financing and Investor Considerations: The share structure should be designed with future financing and potential investment in mind. If the business plans to seek external investment, it is essential to consider whether the existing share structure allows for the issuance of new shares to investors. This may involve creating a separate class of shares or establishing provisions for the issuance of additional shares.
- Tax Planning: Share structure can have significant implications for tax planning. It is important to consider the tax consequences for both the corporation and the shareholders. Different classes of shares may have varying tax treatment, such as capital gains tax, dividend tax, or tax on corporate distributions. Consulting with a tax professional or business lawyer can help ensure that the share structure is optimized for tax efficiency and compliance with relevant tax laws.
- Shareholder Agreements: A well-drafted shareholder agreement is crucial to govern the relationship between the shareholders and outline their respective rights and obligations. The shareholder agreement can address matters such as transfer restrictions, dispute resolution mechanisms, decision-making processes, and shareholder exits. Having a comprehensive shareholder agreement in place can help prevent future conflicts and provide a clear framework for the management and operation of the corporation.
Conclusion: Determining the share structure is a critical step when incorporating a business in Ontario. It is a complex process that requires careful consideration of the objectives, future plans, and legal implications for the corporation and its shareholders. Seeking guidance from an experienced business lawyer, such as Falcon Law PC, can provide valuable insights and ensure that the share structure is tailored to meet the specific needs of the business.
Contact Falcon Law PC at 1-877-892-7778 or info@falconlawyers.ca to receive expert advice and assistance in structuring the share capital of your Ontario corporation. A well-designed share structure can contribute to the success and growth of your business while protecting the interests of the shareholders.
