Classes of shares? Maximum number of shares? Directors? Many a Business Link client has called expressing frustration in trying to set up their own corporation. And while we strongly recommend you utilize the services of a lawyer to fill out this important documentation, that shouldn’t stop us from giving you a little background into the form and what you should be considering for the birth of your corporation.
To incorporate the business yourself, it will cost about $450 (plus $50 for a report to see if the business name you picked is in use, called a NUANS report). A lawyer will cost you $800–$1200. Paying the extra money can save you a lot of stress and ensures that the documents are filled out correctly, potentially saving you thousands of dollars in the future. When you start doing things like selling your business, adding partners or investors, adding family members as shareholders, etc., it will put your self-created legal documents to the test. In addition to forming the corporation, a lawyer will also fill out all the other paperwork that you need to be correctly set up and running. Trust me when I say that will be the best money you will spend on your business.
Now, no matter what I say, you are still going to want to fill out the documents yourself (and that’s why I respect the heck out of you!), so I want to give you an overview of what goes into a corporation. Before I begin, I should point out that, while only one document usually gives people any trouble, there are actually three documents you need to fill out and submit to form a corporation: the articles of incorporation, notice of address, and notice of directors. Below, I will discuss the most confusing of the three: articles of incorporation.
Types of Shares
The types of shares that you might want to consider for your business are common shares and preferred shares. If it’s just you running a good old salt of the earth type business and the prospect of bringing on investors makes you chuckle, you are probably safe with common shares. If you have a grander vision, your investors will prefer preferred (preferred shares have a fixed date that investors can get paid on and they get the first crack at money if a business goes under).
Once that is decided, you then need to think about whether you want voting or non-voting shares. You are required to have some voting shares, but there are times when you might want to add some non-voting common shares that family members, employees, or others can hold. It gives them a sense of ownership in the company, but also means that you don’t relinquish control of your business. It can also be a good tax-saving strategy.
Classes of Shares
There are a variety of classes of shares that you can select. Legally, there has to be at least one class of shares that outlines the ownership. Traditionally, they will be class A shares. Some entrepreneurs will add additional share classes so they can issue dividends to family members for tax reasons, to raise funds, or to include others in the business. A lawyer I know told me he always sets up Class A, B, C, D, E, and F shares when he completes the forms, and that’s why he’s the professional (you should hire one). To set up additional share classes, a lawyer will go in and define what the class B (or C or D, etc.) actually does. This is why a lawyer is used for this document. At its most basic, you could just set up class A shares, which the registry will recognize as ownership shares.
Number of Shares
Yes, you can technically put “one” for the total maximum number of shares to issue, but if you want to avoid the giggles of the staff at the registry office, you might want to consider a few factors. First, what affects your ownership of the business is not the number of shares, it’s the percentage of shares that you own. If you own 1 share out of 1 share or 1 million shares of a total of 1 million, you own the same percentage in a business (100%).
The real reason to add more shares is to prepare for the future. Right now, you are a one-person show, and you may have no real plans to grow, but that could all change. This document is all about the future. While your plans at the moment may be small, things can change, and having options for the future just makes sense. Do yourself a favour and pick a number with a lot of zeros like 100, or better yet, 1000. Your future self will thank me.
Number of Directors
While shareholders own the business, directors are the ones who run it. Like the number of shares, the number of directors is all about planning for the future. Right now it’s just you—until it is not. Consider making room for a couple of directors and plan to be the only one in that position for the immediate future. Consider a minimum to maximum number (for example, one to five), rather than a fixed number. A fixed number can be too restrictive. A range will allow you to change the number of directors without having to amend your articles.
The articles of incorporation is a legal document, and that’s why it’s so important to get it done right. The paperwork for starting a small business with one owner or a multinational corporation with thousands of staff is the same. The paperwork has to be flexible enough to take every possible future for your business into consideration. This means the questions sound funny and the options are plentiful. I’m not sure if I mentioned it yet, but I highly recommend getting a lawyer to help you with this paperwork. Yes, it’s a big upfront cost, but doing things right can save you a lot of money in the future.