If you are running a small business in Canada or planning to incorporate it soon, you have likely encountered the term share structure. It might sound like legal jargon, but it is one of the most important decisions you will make for your business. And no, this isn’t just an accountant’s concern. It directly affects how much tax you pay, how much control you retain, and how you grow.

So, what is share structure, and why should it be at the top of your checklist?

Understanding the Basics of Share Structure

Share structure refers to the organization of a corporation’s shares, including the number of shares, the types of shares, and the rights attached to each. The share structure is set out in the corporation’s articles of incorporation.

Think of shares like slices of a pie. You get to decide how many slices the pie has, who gets how many, and whether some people get whipped cream (dividends), more say in how the pie is eaten (voting rights), or nothing at all (non-voting shares).

There are typically three main types of shares:

• Common shares – Come with voting rights, potential dividends, and capital appreciation.
• Preferred shares – Often non-voting but come with priority on dividends or assets, have the option of converting into common shares.
• Special classes – Customizable to suit specific needs, like income splitting, business control, trading restrictions, and special voting rights.

You don’t need to issue all the shares right away. You can authorize a large number and only issue what you need now, keeping flexibility for future planning.

Why It Matters More Than You Think?

Many entrepreneurs think they can “deal with the share stuff later.” That’s a mistake. Setting up a proper share structure from the beginning can save you headaches— and money —down the road.

1. Tax Planning and Income Splitting

In Canada, income splitting was once the go-to strategy. Although the Tax on Split Income (TOSI) rules introduced in 2018 made this more challenging, a well-structured share setup can still enable some legitimate tax strategies.

For instance, when a company announces a dividend, that dividend is typically for a specific share class, such as Class A shares. If a family member is actively involved in the business and drawing a salary of $100,000, a high dividend of $20,000 could increase their taxable income. Instead, you could allocate them shares with only voting rights and no dividends. And you could allocate dividend-only shares to family members with no income and announce a larger dividend to that asset class. This way, a family can withdraw a higher amount from the business while minimizing tax liability.

2. Attracting Investors and Raising Capital

If you are planning to grow or scale, you will likely need investors. A messy or nonexistent share structure can deter them. Investors want to know:

• What kind of shares are they getting?
• Do those shares come with voting power or dividends?
• What happens if the company dissolves?

A solid share structure shows that you’re organized, strategic, and ready for serious business. You don’t want to be scrambling to fix things when a funding opportunity comes knocking.

Remember, equity capital coming in exchange for shares may look lucrative, but it has the highest cost of capital, as equity shareholders are the beneficiaries of the company’s future earnings. Think through the share structure and shareholder agreement, consult with a professional, and outline the risk-reward before approaching investors. While you do want their investment, you do not want to succumb to their terms and conditions.

3. Protecting Control of Your Business

Want to bring on partners or team members while maintaining control? A proper share structure makes this possible. For instance, you can issue non-voting shares to employees or passive investors. That way, they benefit from the company’s success, but you keep the decision-making power.

Without this foresight, you risk giving away more control than intended or worse, ending up in disputes that could have been avoided with more precise share terms.

What Happens When You Ignore Share Structure?

Skipping the share structure discussion can lead to some real problems:

• You may end up paying more tax than needed.
• If shares are gifted or issued without thought, future disputes are almost guaranteed.
• Investors will hesitate to join a business without a clear and clean share framework.
• If the structure isn’t defined correctly, you could face issues during audits or when selling the company.

And guess what? Fixing these issues later is much more expensive and stressful than doing it right the first time.

Customizing Your Share Structure to Fit Your Goals

One of the most underrated aspects of share structure is its high degree of customization. Depending on your goals, whether it is bringing in partners, planning succession, or preparing for a sale. You can tailor the share classes accordingly.

For example:

• Create a class of non-voting shares to bring in passive investors.
• Set up preferred shares to pay founders fixed dividends.
• Allocate special shares to a holding company or trust for advanced tax planning.

Your business is more than just a logo and a product. It’s a legal entity, and the way it’s structured on paper matters significantly. Whether you are just incorporating or have already years in, it is never too early (or too late) to review your share structure.

It’s not just a technicality. It’s a blueprint for how your business grows, shares profits, and protects your interests. Skipping this step or doing it halfway could cost you opportunities, control, or earnest money.

Before moving forward with a new partnership, dividend plan, capital raising, or expansion idea, take a close look at your share structure.

Contact Glenn Graydon Wright LLP in Oakville to Help You Set Up the Right Share Structure

Talk to a professional business consultant to help you assess and implement a share structure that aligns with your company’s growth and tax strategy. At Glenn Graydon Wright LLP, our consultants offer services including share class planning, incorporation support, and long-term structuring advice. To learn more about how Glenn Graydon Wright LLP can provide you with the expert guidance you need, contact us at 905-845-6633 or connect with us online to schedule your initial consultation.