What Is the Difference Between One and Two Classes of Shares When Incorporating
When incorporating a business in Canada, one of the key decisions you’ll make is how to structure your corporation’s shares. The share structure you choose can impact ownership, control, and the ability to raise capital in the future. Many entrepreneurs wonder whether it’s better to set up one class of shares or two classes of shares.
In this guide, we’ll break down the differences between the two options and help you understand which structure might best suit your business.
At Ontario Business Central, we offer at a click of a button the selection of either the one or two classes of shares as you incorporate your business with us.
Let’s get some information over to you before you decide what is best for your circumstance.
What Are Classes of Shares?
A class of shares refers to a group of shares that carries specific rights and privileges. Shares can be thought of as “pieces” or “units” of ownership in a corporation. Owning shares means owning a portion of the company, and different classes of shares can grant different rights to the shareholders.
These rights can include:
- Voting rights: Some classes of shares allow the shareholder to vote on corporate matters, while others do not.
- Dividend rights: Certain classes can be entitled to dividends, either fixed or variable.
- Asset distribution: In the event of winding down the company, some classes may have priority in receiving assets.
Common types of shares include:
- Common shares: Typically come with voting rights and the potential for dividends.
- Preferred shares: Often have fixed dividends and priority over common shares for asset distribution but may have limited or no voting rights.
Choosing the right class of shares is an important part of shaping the control and financial structure of your corporation.
One Class of Shares
A corporation with one class of shares issues the same type of share to all shareholders, and these shares carry identical rights.
Advantages of One Class of Shares
- Simplicity: With only one class, there are fewer rules and less paperwork to manage.
- Cost-effective: Incorporation documents and shareholder agreements are simpler and cheaper to draft.
- Ideal for sole owners: If you’re the only shareholder, one class is usually sufficient.
Disadvantages of One Class of Shares
- Limited flexibility: All shareholders have the same rights, which can make it difficult to tailor ownership structures.
- Challenges for future investment: Adding investors later can be tricky if you want to offer different rights or privileges.
A single class structure is often ideal for smaller businesses and sole proprietorships converting to a corporation.
Two Classes of Shares
A corporation with two classes of shares creates two distinct types, each with its own rights and privileges.
Advantages of Two Classes of Shares
- Flexibility: Different classes can be structured to allow various levels of control, dividends, or ownership.
- Attractive to investors: Investors may prefer a different class of shares that offers dividends without voting rights.
- Succession planning: You can retain control while transferring economic benefits to family members.
- Diverse ownership: Two classes of shares make sense if you have different ownership groups, including investors, family members, or “silent partners” who provide financial support but are not involved in daily activities or decision-making.
Disadvantages of Two Classes of Shares
- Complexity: Requires careful drafting of incorporation documents and shareholder agreements.
- Increased legal and accounting costs: Managing multiple classes means more regulatory compliance.
Businesses that anticipate growth, outside investment, or multiple owners often benefit from setting up two classes of shares.
Key Differences Between One & Two Classes of Shares
Here’s a quick comparison:
| Feature | One Class of Shares | Two Classes of Shares |
| Control & Voting | Equal voting rights for all shareholders | Can separate voting and non-voting rights |
| Dividends | Same dividend rights for all | Different dividend rights for each class |
| Ownership Flexibility | Limited | Greater flexibility to customize ownership |
| Succession Planning | Difficult to structure | Easier to transfer economic interest only |
Which Structure Is Best for Your Corporation?
The best structure depends on your business goals:
- One Class is often best if you’re a sole owner or want to keep things simple.
- Two Classes make sense if you plan to bring in investors, offer shares to family members, or prepare for complex ownership scenarios.
Always consider your future plans for growth, control, and succession when deciding.
How to Set Up Your Share Structure in Canada
When incorporating your business, you’ll outline your share classes in the Articles of Incorporation. It’s important to define the rights, privileges, and restrictions for each class clearly.
Ontario Business Central can help simplify this process. Whether you’re choosing a simple structure or a more complex multi-class setup, our team ensures your incorporation documents are properly drafted to suit your needs.
Frequently Asked Questions
What are common types of shares in Canada?
Common shares and preferred shares are the most typical. Common shares usually come with voting rights and a claim on profits, while preferred shares often have fixed dividends and priority for assets.
Can I change my share structure later?
Yes, but changing share structure usually requires filing Articles of Amendment and may involve legal fees and shareholder approval.
Do I need a lawyer to set up Share Classes?
While it’s not mandatory to use a lawyer, legal advice can help ensure your share structure matches your business needs and complies with the law.
If you wish to do a more complex share structure of three or more classes, here is a listing of a few law references to assist you in finding a lawyer who specializes in corporate law.
How many classes of shares can a corporation have?
There is no legal limit to the number of share classes a corporation can have, but most small businesses use one or two.
What is the difference between voting and non-voting shares?
Voting shares grant the shareholder the right to vote on important company decisions, such as electing directors or approving major changes. Non-voting shares typically do not offer voting rights but may still provide other benefits like dividends and a share of the company’s profits. Companies may issue non-voting shares to raise capital without giving up control.
Are shares available for a registered business?
No, shares are only available to incorporated companies. Registered businesses, such as sole proprietorships or general partnerships, do not issue shares.
Choosing the right share structure is an important decision when incorporating your business. Whether you opt for one class or two, it’s essential to match the structure to your current and future business goals.
Ontario Business Central has been helping entrepreneurs incorporate for over 30 years. Our team is ready to assist you in setting up your corporation with the right share structure to support your success. Get started with us today and build your business with confidence.
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Ontario Business Central Inc. is not a law firm and cannot provide a legal opinion or advice. This information is to assist you in understanding the requirements of registration within the chosen jurisdiction. It is always recommended, when you have legal or accounting questions that you speak to a qualified professional.
