Incorporation in Canada

Shareholders

Every private corporation must have at least one shareholder. There may be more than one shareholder, but a private corporation may not have more than 50 shareholders.

The shareholder (or shareholders) of a corporation are in effect the owners of the corporation because of the votes that are usually attached to the shares.

Remember that the structure of a corporation is different from a sole proprietorship or partnership: while you (and your partner or partners) directly own a proprietorship or partnership and are personally responsible for the liabilities of the business, a corporation is a legal entity controlled by its shareholders; the corporation is responsible for its liabilities (unless a shareholder makes a personal guarantee).

If you wish, you may have just one shareholder, yourself, or you may have a number of shareholders. If one person controls a majority of the shares, that person controls the corporation. The shareholder(s) in a corporation elect the director(s), and the director(s) oversee the business of the corporation and appoint the officers (president, secretary, treasurer, etc) to manage its day-to-day affairs.

If you are the sole shareholder, you can elect yourself the sole director and then appoint yourself president. The effect of the corporate structure is to remove your personal liability from the corporation — your personal liability is limited to the cash and property you contributed to the company (usually in exchange for shares).

Once the company is properly incorporated, a creditor′s only recourse is to the assets of your company — a creditor cannot normally seek compensation via your personal assets. You should be aware however that there  have been recent cases in Canada where directors and officers have been found personally liable for the obligations of their company —typically, these cases have dealt with unpaid wages or environmental contamination.

There are few good reasons to issue a lot of shares in a new corporation, and lots of good reasons to keep the initial number of shares to a small number.

Classes of Shares

The shares issued in a corporation determine the rights of shareholders in the corporation. They determine whether the shareholder has:

  • the right to vote at shareholder meetings on issues affecting the corporation,
  • the right to receive a dividend when declared by the directors, and
  • the right to share in the distribution of the corporation’s property when the corporation is dissolved.

When setting up your corporation, you need to decide if you want to have different classes of shares with different combinations of the above rights. The shares you issue become the “authorized capital” of the company.

When setting up a typical, small corporation with a small number of shareholders, the authorized capital is usually an unlimited number of shares of one class. These are called “common shares” and include all three rights described above.

If your ownership is more complicated and you wish to create and issue different classes of shares, you should seek legal and accounting advice before proceeding, as you will want to be certain that each class of shares accurately reflects the combination of rights you want them to carry.

Caution

Remember that whoever holds the shares of a corporation “owns” the corporation because the votes that are usually attached to the shares give the shareholders control of the corporation. If you plan to issue shares to attract key staff to the business, you will want to consider limiting the rights vested in those shares. For example, you might want the shares to only include the right to receive a dividend.

How Many Shares to Issue?

The first thing to know is, how many shares are issued when a company is formed is irrelevant. You could issue 10 shares, or 1,000 shares, or 10,000 shares.

Let′s assume you will be the sole shareholder in the corporation. A typical approach to incorporating this business would be to “issue and alot” (give you ownership of) 1,000 common shares in the company in exchange for your business assets. If no other shares are issued, your 1,000 shares are the issued capital of the corporation and you have total control of the affairs of the corporation. If there are two equal shareholders in this scenario, each would be issued 500 shares.

There is a potential problem with this approach. The theoretical value of the shares you issue when you incorporate is the value of the cash and property you contributed to the company (the authorized capital of the company). I describe this as theoretical because someone buying the company the day after you incorporate would not have much else on which to base the value of the business!

Let′s jump forward a few years. Your business has been wildly successful, is pulling in hefty profits, and you are looking for an investor or two to bring some fresh capital into the business so you can expand. You want to sell them some of your shares in return for their investment. The problem you now face is, because only a small number of initial shares were issued, shares in your very successful company are seriously expensive!

So it may be useful to issue a larger number of shares when you incorporate, rather than a smaller number. There is no “rule” for how many shares to issue at the time of incorporation, but my view is that (within reason) more is better than less.

You will need the complete residential address of each shareholder.

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