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Things to Consider When Incorporating Your Business: Part II

Written by: Krystin Kempton, Associate

So you’ve named your company. Now what?

Determining your share structure and shareholders is a key consideration. The ownership of a company is dividedinto shares. Shares can then be divided into classes, which can be used to give shareholders varying rights. Therights and restrictions of a share class include or exclude the right to vote, the right to receive dividends if declaredby the directors, and the right to receive the remaining property of the company after it is dissolved. A company can be incorporated with one class of shares, or multiple classes of shares with different rights and restrictionsapplying to each class, or multiple classes of shares with identical rights and restrictions, or a combination thereof.

All shareholders within one class of shares must be treated equally when dividends are paid out. So if there aretwo class A shareholders – for example, Bob with 25 shares and Mary with 75 shares – and the company declaresan aggregate $100 dividend on the class A shares, Bob will receive $25 and Mary will receive $75. However, if Bobis the only class A shareholder (with his 25 class A shares), and Mary has 75 class B shares, then if the companydeclares a $100 dividend on the class A shares, the $100 is received exclusively by Bob. Having multiple classes ofshares in a company with identical or similar rights and restrictions therefore gives directors the ability to paydividends to some shareholders but not to others as directors “sprinkle” dividends differently across the classes. Itis always important to obtain tax advice from an accountant with respect to determining share structure andpaying out dividends – particularly in light of recent tax changes.

A company has to have at least one shareholder. A shareholder can be a person, a trust, a mutual fund or acorporation. Rights of shareholders include the right to vote at shareholders’ meetings (provided they hold votingshares), the right to receive a share of the profits of the company, the right to examine and copy corporaterecords, financial statements and directors’ reports and the ability approve major or fundamental changes of thecompany. The larger the number of voting shares a shareholder holds, the bigger the impact the shareholder canhave on the company’s major decisions. If you wish to retain control over your company, consider limiting othershareholders (if any) to non-voting shareholders.

Voting shareholders elect the board of directors. Directors are in charge of the overall management of thecompany and must act in the best interests of the company. A company must have at least one director. Officers(i.e., President, Secretary, Treasurer) are appointed by directors and manage the company’s day-to- day operations.Under the Business Corporations Act (British Columbia), officers are optional.

Entering contracts and endorsing cheques on behalf of the company requires the signature of a duly authorizedcompany representative. Consider who should have signing authority for the company – i.e., any director, alldirectors, a specific officer?

Once incorporated, a company is obligated to maintain proper records and meet ongoing reporting obligations byfiling an annual report with supporting resolutions kept in the company’s record book. The British ColumbiaCorporate Registry may dissolve a company if the company fails to file its annual report for two consecutive years.All companies also must file a corporation income tax return every year even if there is no tax payable.

We recommend seeking legal advice to discuss setting up the company’s articles, ensure the incorporation iscompleted properly, understand continuous disclosure requirements in British Columbia and to discuss a potentialshareholders’ agreement to set out the relationship among shareholders if the company has more than oneshareholder, particularly as investors are brought into the company.

 

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