Structuring your Corporation part 1

There is so much to consider in structuring a corporation and this blog will definitely not be able to cover all the considerations and options for structuring, nor should this blog be misconstrued as legal advice.  That said, in this blog series I will give you a lot of very useful information and tips on structuring corporations.  Because this blog series is on corporations, we will not be going into any great detail on the various other entities and contracts you can use in your structure, such as trusts and Limited Partnerships. 

There are virtually unlimited options when it comes to structuring your corporation as there are many different classes of shares within multiple categories.  The different classes of shares are in letters, such as class A shares, class B shares, class C shares, class D shares etc.  The 3 main categories of shares are:

1. Voting Shares – Used for the main shareholders with voting rights
2. Non Voting Shares – Used for other shareholders with no voting rights
3. Preferred Shares – Shares with preferred treatment, typically used for attracting investors or in restructuring existing corporations

Let’s start with some basics that you should know in structuring a corporation.  First you should always consider making both you and your spouse a shareholder in your corporation if you are married.  In making both spouses a shareholder you are opening up the door for income splitting the profits of the corporation through dividends.  Being a shareholder does not mean liability is taken, in fact it is typically the director that would take all liability of the incorporation as we’ve discussed in a prior blog.  So both spouses can be shareholders and receive benefit, while only one spouse could be a director taking the liability on.  It is always good to keep one spouse sheltered from liability. 

We’ll continue our blog series on “Structuring your Corporation” on my next blog post.

What is a corporation

As we stated in the introductory blog, “A corporation is an entity created by a person or a group of people for the purpose of creating a separate legal entity for themselves.”  A corporation has similar rights to that of an individual as it may earn income, borrow money, lend money, run business and more.  It is like having an artificial entity that you can control. 

Just like we get a Birth Certificate when we are born, a Corporation gets a Certificate of Incorporation when it is created or “born”.  The Certificate of Incorporation, along with the Articles of Incorporation gives the Corporation its existence.   Remember that the laws that the Corporation abides by is determined by the jurisdiction of where the Incorporation was formed.

Corporations typically have a different taxation system than individuals do.  Later in this series we will discuss some of the taxation rules of Corporations and how to maximize the tax savings of a corporation. 

As also mentioned in the past blog, Corporations offer a limited liability for the person or group of people that set up the corporation.  For instance the owner(s) of an incorporation, called the shareholder(s), take no real liability except for any money they have put into the corporation.  The Director of a corporation is the one that takes the liability.  This is the person that is the “operating mind” of the corporation.  Because there is a limited liability, the director is not responsible for all liabilities, only things like Government and CRA debts, environmental damage or any debts of the corporation that were personally guaranteed by the director.

Watch out for my next blog where we will get deeper into understanding the basics of the corporation and get to know the 3 main people or groups of people that make up a corporation.