The family business – Incorporating properly

Posted: September 19, 2013 in Family Businesses

Incorporation can take place at any time.  The fiscal year end can be any month of the calendar year. Incorporation usually occurs for tax reasons. The marginal tax rate of the individual (proprietor) is north of 45% so incorporation makes sense.

One of the drawbacks I see with small business corporations is their share structure. They are usually structured as “mom ‘n pop” corporations. The authorized capital is “an unlimited number of common shares” and the issued capital varies between 1 share and maybe up to 500 shares.

The problem with this type of share structure is that it assumes there will be no new shares issued to (family) investors.  There isn’t much thought given to estate or succession planning so, no preferred share capital is authorized, let alone issued.

A well thought out share structure should include:

  • Unlimited number of retractable non-cumulative preferred shares @ $25 each.
  • Unlimited number of Class A common voting shares
  • Unlimited number of Class B common voting shares

The parents get Class A shares. The kids who might one day assume control of the business get the Class B shares. This share structure will become more important as the parents reach the stage where they want to pass control of the business to their kids and want to monetize their equity.

More on this later.




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