What are Shares?
When you incorporate a business, it is divided into portions of ownership, called shares (also referred to as stocks). Shares are distributed among shareholders and each unit is assigned a monetary value, as well as certain rights. Proof of share ownership is represented through a share certificate
Share classes are different groups of shares that grant specific rights or privileges to a shareholder.
These rights may include:
- Voting rights: whether a shareholder can vote during meetings on managerial issues, such as who will be a director.
- Dissolution rights: whether a shareholder is entitled to proceeds from the remaining assets if the corporation dissolves.
- Dividends: whether a shareholder is entitled to dividends from the company’s profits.
What is the difference between Common Shares and Preferred Shares?
Preferred shareholders may be promised fixed dividends at regular intervals in priority to common shareholders if the corporation performs well.
Preferred shareholders will also usually be paid a fixed price, per share, out of the remaining proceeds upon dissolution in priority to the common shareholders, who will share what is left over, if any. Some preferred shares are redeemable (can be purchased or sold at a certain price) at the option of the corporation, the shareholder, or both.
Common shareholders are afforded the right to vote. Often, preferred shareholders are not.
Lastly, common shares have potential to increase in value if the company experiences growth, whereas the price of preferred shares won’t change much.
Most small businesses should only be issuing common shares. Preferred shares are usually only used on the advice of accountants to take advantage of tax savings. Depending upon your jurisdiction, LawDepot creates a share structure with at least the following:
- Class A Common Voting Shares
- Class B Common Non-Voting Shares