Shares are a type of property - like a house or a car - that represents an ownership interest in a corporation.
Corporations issue shares for a variety of reasons. For example, to provide investors with an ownership interest in exchange for their investment. But how does a corporation decide who gets what type of shares? Different categories of shares exist to allow a corporation to issue shares based on the relationship of the person/entity with the company. For example, founders, investors, and employees may all own different categories of shares of the same corporation. Each category has a purpose and is governed by rules specific to its type.
Today we’ll cover the five most common types of shares that a corporation can issue. Contact us to discuss the right corporate structure for your company.
1. Voting/Common Shares
Common shares are the ones most people talk about. This category often has the right to vote, the right to receive dividends, and the right to receive a share of the remaining property of the corporation upon liquidation.
Common shares often give the shareholder one right to vote per share owned. Furthermore, common shares offer investors more control over the direction of the company, therefore attracting more investors. As a result, this limits the possibility of the owners of the company taking advantage of the resources available to them within the corporation. This category only receives dividends after the shareholders with preferred shares.
Shareholders of these common shares receive a share of the remaining property of the corporation upon liquidation.
2. Control Shares
As the name suggests, control shares give the founders/directors more votes per share than other classes of shares. This allows them to keep control over the company. For example, where one common share may have one vote per share, control shares may have 10 votes per share.
These shares usually only provide the right to vote. There are no dividends and there is no participation in receiving a share of the remaining property of the corporation upon liquidation.
3. Non-Voting Shares
Non-voting shares are similar to common shares, except they have no voting rights. A company may issue non-voting shares to employees to allow them to benefit from dividends without giving them the right to vote. Further, these shares may be issued in large quantities to raise capital without fear of diluting the control of the founders/directors.
Similar to the common shares, shareholders holding non-voting shares are entitled to receive a share of the remaining property of the corporation upon liquidation.
4. Preferred Shares
Preferred shares are like a cash loan for the corporation. They are often issued to investors like venture capitalists and angel investors. Those buying these shares inject a sum of money into the company and receive a fixed, cumulative dividend rate in exchange. Holders of preferred shares have no right to vote on matters of corporate governance. This allows the company to keep control over its business while accessing an increase in cash flow.
Upon liquidation of the corporation, preferred shareholders have priority in receiving the assets that remain the property of the corporation.
5. Rollover Shares
Rollover shares are issued to “rollover” property to the corporation. This property is usually equipment or assets from the founders/directors to the corporation. This is a way of transferring ownership without an immediate tax impact. As such, a price adjustment provision is often added in case tax authorities are of the option that the redemption value of the shares does not represent the fair market value of the rollover property.
Rollover shares do not have the right to vote. However, they do have a priority right to receive a share of the property of the corporation upon liquidation.
We recommend having different categories of shares in your capital structure. Even if no shares of that category are issued. It will be more time- and money-consuming to amend your share structure later on if you ever need to issue those shares. Get in touch with us today to discuss the structure that suits your needs.
This blog post is not legal advice and is for general informational purposes only. Always speak with a lawyer before acting on any of the information contained herein.