Share Structure for a New BC Company: Share Classes in Plain Language

When you incorporate in British Columbia, you choose a share structure, whether you think about it or not. Online incorporation services often default to a single class of common shares, which can be fine, until you want to bring in a spouse, an investor or the next generation.

This guide explains what share classes are, where their rights are written down, what kinds of rights are common in small and family companies, and how hard it is to change the structure later.

Where your share structure is written down

Two documents carry it. The notice of articles, filed with BC Registries, describes the company's authorized share structure. Under sections 11 and 53 of the Business Corporations Act (BCA), it must name each class of shares, state the maximum number the company may issue in each class (or that there is no maximum), say whether the shares have a par value, and state whether special rights or restrictions are attached.

The articles are the company's internal rulebook. Section 12 requires them to set out, for each class and series, all of the special rights or restrictions attached to those shares. In practice, that means the real substance of "Class A" or "Class B" lives in the articles, not in the label.

What a share class actually is

Under section 52 of the BCA, every company's authorized share structure must have at least one class of shares. If the charter does not expressly create classes, all of the company's shares form a single class (section 59).

Two rules from section 59 do most of the work. Every share is equal to every other share, except as the special rights or restrictions provide. And every share within a class must carry the same special rights or restrictions as every other share of that class. So if you want two people to hold shares with different rights, they generally need shares of different classes (or, in some cases, different series within a class).

The names themselves mean nothing in law. "Class A Common" in one company may be voting shares; in another it may be non-voting. Always read the articles.

Rights and restrictions commonly attached to classes

• Voting. Whether holders can vote at shareholder meetings, and sometimes how many votes each share carries. Voting shares are how founders keep control.
• Dividends. Whether the class can receive dividends, at what priority, and whether the directors can declare dividends on one class without declaring them on another. That flexibility is a common reason for multiple classes in family companies.
• Redemption or retraction. Whether the company can buy the shares back at a set price (redemption), or the shareholder can require it to (retraction). These features appear in estate freezes and investor shares.
• Priority on wind-up. Whether the class gets its capital back before other classes if the company is dissolved, which is what usually makes a share "preferred".
• Restrictions. Limits on transfer, conversion rights, or a cap on what the class can receive.

Some rights are limited by the statute regardless of what the articles say. For example, a company cannot pay a dividend in money or property, or redeem or buy back shares, if there are reasonable grounds to believe it is insolvent or would become insolvent as a result (BCA sections 70, 78 and 79).

How small and family companies often use classes

As a simple illustration only: a founder might hold voting common shares that control the company, while a spouse or adult child holds a separate non-voting class that can receive dividends. Later, an estate freeze might exchange the founder's growth shares for fixed-value preferred shares so future growth accrues to new common shares held by the next generation. Our article on estate planning for BC business owners looks at how shares fit into a wider plan.

Tax drives many of these choices, and the rules are technical. In particular, the federal tax on split income in section 120.4 of the Income Tax Act can tax certain dividends received by family members at the highest individual rate. A structure should be reviewed with your accountant before shares are issued, not after.

How many shares should you issue?

The authorized structure can allow an unlimited number of shares in a class. What matters is how many you actually issue and to whom, because the issued shares fix each person's proportion of votes and value. For shares without par value, the issue price is set as the articles provide or, if they are silent, by directors' resolution (section 63), and a share cannot be issued until it is fully paid (section 64).

Many small companies issue a modest round number of shares to start. The number itself is less important than leaving room in the structure for future shareholders and recording each issuance properly in the company's records.

Changing the structure later

A company can create new classes, alter maximums and make other changes under section 54, usually by altering its notice of articles and articles. Creating, varying or deleting special rights or restrictions requires the type of shareholder resolution the articles specify or, if they are silent, a special resolution (section 58). If a change would prejudice or interfere with the rights of an existing class, section 61 requires the consent of that class by a special separate resolution.

That is why it is easier to build flexibility in at the start. If you are already planning to bring someone in, see our guide to adding a new shareholder to a BC company, and our comparison of incorporating online or with a lawyer for what a default structure may leave out.

Setting up a company? Design the share structure before you file

Our business lawyers can draft articles and share terms that fit your plans for control, family involvement and future investors, and coordinate with your accountant on the tax side.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.