As a Canadian business owner, you have various options to structure your corporation, and one such option is having multiple classes of shares. In this blog post, we will explore the benefits of having multiple classes of shares and how it can benefit your corporation.
What are multiple classes of shares?
Multiple classes of shares mean that a corporation can issue more than one type of share, each with different rights and privileges. These rights and privileges can include voting rights, dividend entitlements, redemption rights, and conversion rights. The most common types of shares are common shares and preferred shares.
Benefits of having multiple classes of shares
- Flexibility in ownership structure: Multiple classes of shares allow for flexibility in ownership structure. For example, if a corporation wants to raise funds from outside investors without diluting the voting power of the founders, it can issue preferred shares with no voting rights.
- Customizable dividend entitlements: With multiple classes of shares, a corporation can customize the dividend entitlements for each class of shares. For instance, preferred shares may have a fixed dividend rate while common shares may have a variable dividend rate based on the corporation’s profitability.
- Protection of rights: By having multiple classes of shares, a corporation can protect the rights of different shareholders. For example, preferred shareholders may have priority over common shareholders in the distribution of assets in case of liquidation.
- Tax planning: Multiple classes of shares can also be used for tax planning. For instance, a corporation can issue preferred shares to pay dividends to family members who are in a lower tax bracket than the common shareholders.
- Facilitate mergers and acquisitions: Having multiple classes of shares can make mergers and acquisitions more manageable. For example, if a corporation has preferred shareholders, it can offer them a premium to acquire their shares, without affecting the common shareholders’ voting rights.
Conclusion
Having multiple classes of shares can be advantageous for a corporation, as it provides flexibility in ownership structure, customizable dividend entitlements, protection of rights, tax planning, and facilitates mergers and acquisitions. However, it is essential to seek professional advice before implementing such a structure to ensure compliance with relevant laws and regulations.
If you are a business owner in Toronto or Ontario and are considering incorporating your business or changing your corporate structure, contact a professional to guide you through the process. They can help you understand the legal requirements and provide you with advice tailored to your specific needs.