So, you’ve decided to take the plunge and register your business in Canada. You’ve chosen who will run the company as directors and officers, what the name of the business will be, and which jurisdiction you'll incorporate in. But, you haven't discussed how many shares or securities that will be issued upon incorporation–or what kind.
Understandably, aspiring business owners have trouble answering this question: it’s complex. When it comes to any financial transaction in your corporation, advice from experts is almost always necessary. However, there are still several things you the owner should know about issuing shares in your new company.
- What are shares/stock?
- Types of shares you can issue
- Authorized shares vs. issued shares
- Factors to consider when issuing shares
- Issuing shares in a small business
- One owner and director of the company
- Co-owners of the corporation
- Multiple shareholders in the corporation
- Issuing shares in a startup that plan to raise money
What are shares/stock?
Shares are a form of property. They represent ownership interest in the company. This means that whoever owns shares in a corporation is one of the owners of that corporation. Note that sometimes the term ‘owners’ can be used colloquially to refer to the directors and/or shareholders of a corporation.
Technically speaking, the owners of a corporation are the shareholders, and the directors/officers are those elected to manage the business–though these roles are not mutually exclusive. If you are operating a corporation on your own, you will typically own all the shares of the corporation as well.
Shareholders do not have to be individuals, either. Shares can be held by trusts, or other companies. Regardless of the type of entity holding the shares, shareholders have various rights and responsibilities such as:
- Voting on shareholder matters
- Receiving a share of company profits through dividends
- Electing and dismissing directors
Note that shareholders do not have the ability to open a business bank account, enter into contracts for the company or sign instruments on behalf of the business. Those responsibilities fall to directors/officers.
Types of shares you can issue
Generally speaking, there are three different kinds of shares available to be issued, depending on the authorized capital (a document that lays out the types of shares a corporation may issue) of the corporation. There are:
- Common voting shares
- Common non-voting shares
- Preferred shares
Common voting shares typically carry the ability to vote at meetings, receive dividends from the company at its year-end, and can receive any remaining assets owned by the corporation, should it be dissolved. Keep in mind that preferred shareholders will have the first call on these assets before the common shareholders (more on that below). Usually, persons that are running the corporation, or are closely involved with the business, are given common shares.
Common non-voting shares are–as the name denotes–unable to vote at general meetings of the shareholders. They are usually given the right to receive dividends and may or may not be able to receive remaining assets upon dissolution. Shares such as these are usually issued to individuals that want to be a part of a corporation, but do not want to be involved in operations (also known as “silent investors”).
Preferred shares are a complex share type that carries various rights and restrictions based on the circumstances surrounding the issuance. These shares usually have the first right to receive any dividends or any assets of the corporation should it dissolve (hence the term “preferred”). In addition, these shares may also have a set value attached to each share (e.g. $1) rather than being self-adjusting with the fair market value of the company–as common shares are.
Preferred shares are not usually issued upon incorporation unless there are specific circumstances that warrant it, such as investors that want to receive shares to match their contribution dollar-for-dollar.
Authorized shares vs. issued shares
Whenever shares in a corporation are discussed, there's a crucial distinction that needs to be made: authorized shares versus issued shares.
Authorized shares or a corporation's authorized capital are the pool of stocks your company can issue from at any time. Think of authorized shares as potential shares, not actual ones. Authorizing the correct amount and type of shares is paramount for corporate success, as the amount and type of shares you have access to directly correlate to investment opportunities. If you only chose to authorize 100 shares across two common voting classes, for example, you'll quickly run out of shares to issue. Though authorized shares can be changed by amending the corporation's share structure, this can be costly.
A company's authorized share pool is derived from its articles, documents that set out the the structure of the company. It is critical that a business' articles reflect its goals in terms of investing opportunities, funding approaches, and potential employee shareholders. The Government of Canada indicates that a corporation can have any number of classes of shares, so long as the proper rights and restrictions are noted.
Keep in mind that deciding on what kind of share structure is something only legal professionals do. However, understanding what you plan to use your shares in your business for will make sure both you and your legal team are on the same page.
On the other hand, issued shares are shares currently held in the capital of the corporation by the founders or other partners. These can be transferred within in the corporation or be repurchased/redeemed to increase the authorized amount of shares for that same class.
Factors to consider when issuing shares
Since we’ve discussed the types of shares you can issue and their general use, let’s examine key factors you should keep in mind when issuing shares upon the creation of your corporation.
Who will be receiving the shares
In essence, the people that receive shares in your company will have a say in how the company operates and be able to receive profits from the company–if the directors declare dividends. Tyler Vant Erve, a corporate solicitor at KMSC Law LLP notes that, “Incorporators should refer to their authorized share capital to consider what rights and privileges each individual shareholder will have. Some common questions I consider with new business owners are: (i) Should the shareholder be entitled to vote at any meeting of the shareholders? and (ii) What dividend rights will a shareholder be entitled to?”
Access to funds the corporation produces and the ability to control its trajectory, even slightly, are factors new business owners must take into account if they plan to issue shares to more than just themselves.
Future plans for the business
Making prudent business choices is about having an eye toward the future, and issuing shares is no different. “Business owners would be wise to look ahead.” Vant Erve advises. “You can avoid the extra time and expense that comes with reorganizing the shares of your corporation down the road simply by thinking about how your shares will be used now and planning ahead for how they might be used in the future.”
If you’re hoping to bring on a business partner after your first year, for example, consider authorizing an even number of shares to sell when your future partner decides to buy into the business. Further, ensuring that your corporation’s share capital allows for more than one class of shares (e.g. Class A and Class B shares) will give you flexibility on how to declare dividends at the end of the year, too. You could choose to declare dividends to only one class of shares or both, for example.
Preparing for the future also means measuring the flexibility of your authorized capital. Does it have multiple classes of shares? Are these some non-voting share classes for silent investors? Questions such as these need to be pondered before you decide who gets a piece of your corporate pie.
How many shares should you issue upon incorporation?
Short answer: it depends. As noted above, you’ll want to consider many different factors before issuing shares. Here are some ideas to consider if you’re a small business (e.g. a freelancer) looking to issue shares but have limited plans for growth.
Issuing shares in a small business
In small business situations, the exact number of shares issued does not have as large an impact for startups or companies seeking to go public. You would be well poised for success issuing anywhere from 100 to 10,000 shares per shareholder, so long as you're not seeking large investment opportunities. Arguably the most important consideration is to keep things easy to divide by issuing even amounts of shares (or odd amounts if you expect to have an odd number of shareholders). With this in mind, let's look at a few common scenarios small businesses run into.
One owner and director of the company
In cases like these where only one person is a part of the company, simply issuing a nominal amount of shares may suffice. Anywhere from 100 to 10,000 shares is a solid number to start with, as it gives you flexibility for future transactions, should you decide to sell a portion of your ownership.
Co-owners of the corporation
If you are choosing to start a business with another individual, issuing shares to match each partner’s contribution is a potential option. If both individuals are planning to contribute equally to the business, giving them each 50 percent of the business is a potential idea. Note that this could result in a stalemate if any sort of disagreement occurs. For this reason, a 51/49 split is another common option.
In contrast, if one partner is going to be doing most of the lifting while the other will do minimal work, issuing shares to represent their contribution is a common approach. A breakdown such as 70/30, 90/10, or similar ratio is common. Note that depending on the lesser contributor’s role, you may want to issue them non-voting shares if you feel they should not (or do not want) a voice in the operations of the business.
Multiple shareholders in the corporation
In situations with several shareholders (three or more), things can get quite complex. As with many business endeavours, receiving advice from an accounting or legal professional is well-advised–especially with share transactions. Companies looking to bring on many shareholders are especially recommended to seek outside advice.
You’ll want to consider the factors we mentioned above and also consider if your authorized capital allows for many different classes of shares. For instance, if you plan on issuing shares split between five investors, you could have at least five different classes of shares–assuming each individual will get their own class. Flexibility is paramount.
Issuing shares in a startup that plan to raise money
Start-ups that are seeking to grow in the near future, or receive large amounts of capital from investors, are an entirely different beast altogether. However, there are some general rules of thumb to consider.
For one, while there is no perfect number of shares that every startup must authorize, a substantial amount of shares, such as 10 million, will allow the flexibility required when seeking funding–or providing employees with stock options. Note that all 10 million shares do not need to be issued on day one, but they need to make up the authorized share capital (the pool of shares available for issuance).
As for how many shares should be issued to the founders on day one, the amount should be substantial, usually between 1 and 6 millions shares. For instance, if your company has only issued 100 shares and is valued at $10 million (a typical seed-stage startup valuation), it would be unable to accept investments smaller than $99,010. Therefore, if an angel investor is interested in investing $50,000 in your start-up, you wouldn't be able to accommodate him, as you cannot issue a fraction of a share.
How many shares should I issue if I want my company to go public?
Another reason to issue millions of shares for startups is to prepare for an initial public offering (IPO) or, in other words, to offer its shares to the public. In order to be listed on the TSX-V, Canada's junior exchange, companies need to have a minimum of one million free floating shares, which exclude the shares owned by founders or held by long term institutional investors. As a result, a company seeking to go public should issue more shares to the founding team than other companies. Obviously, if your intention is to go public, you should seek a securities lawyer to advise you, as mistakes done when incorporating could be costly to fix once the company is ready to go public.
In sum, issuing shares in a new corporation is no small matter. It requires careful deliberation and a robust understanding of where your business is currently and where you ultimately want to end up. Issuing and authorizing the correct amount of shares can help position your business for success.
FAQs About Shares Issuance in Canada
You can transfer shares a myriad of ways in Canada such as by sale, rollover, exchange, redemption, repurchase, or cancellation–to name a few.
To issue shares in a private company you’ll likely need to contact a legal or accounting professional for advice and assistance drafting legal documentation to effect the issuance. If the issuance is concurrent with the organization of your company, then these documents will be drafted for you if you choose to incorporate through a law office or an online service such as Ownr, for example.
Yes. A company can issue shares so long as its authorized capital allows for more shares to be issued. In some cases, a company’s authorized capital may only allow for a certain number of shares to be issued. In these cases, you may need to amend your authorized capital to allow for another issuance.
Shares, or rather the percentage ownership they represent, becomes diluted when new shareholders are brought into the business via the issuing of new shares. Let’s say Jim owns 100 shares in ABC Company Inc., which is 100% of the business. His company issues 50 shares to a new investor, Bob. In this case, Jim’s ownership percentage in the business has gone from 100% to 66% by bringing on this new shareholder. That’s dilution in its most basic form.