Share Capital

by Stanley

Capital Structure

Capital Structure

My clients (3 owners together, 50%,30%,20%) just setup a new small corporation to buy a franchise business. They are going to use their own fund $150,000 and borrow $100,000 from bank.

How much capital shares should I record in their equity account? I see some small corporations with only one owner just put $100 in capital share, and the balance is recorded to "Due to shareholders" in libility.

Should I do the simlar thing? $50,$30,$20 is recorded for capital shares for these three owners and 149,900 is recorded to "Due to shareholders"?

What results would be in taxation or accounting if I record capital share amount with different amount(for example $500,300 and $200 for the three owners)?

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It is my understanding that the share capital is determined when the company is setup. They really need to see a tax accountant or tax lawyer to ensure they setup the share capital in a way that best facilitates their uniques circumstances. This is particularly important as they aren't all contributing the same amount of capital. I would not "cheap out" here as it could cost them in the long run.

If you have the lawyers documents from the incorporation, you should find it there I think. You should also be able to find it in their minute binder under share certificates. These would have been issued when they incorporated.

A Simon Fraser University article by Simon Volker ( discusses share capital:

"One of the details of incorporation, covered in the afore-mentioned articles, relates to classes of shares. A company has the right to define its "capital structure" in many different ways, i.e. it can define various classes and types of shares which it will issue. For example, companies usually issue one class of shares, namely "common" shares. These shares are precisely that: "shares" of ownership. Each share entitles shareholders to one vote at shareholder meetings and each share entitles its holder to one share (i.e. 1 divided by the number of shares issued in total) of the corporate profits. You may have heard of "Preferred" shares. Such shares have certain "preferred" rights. For example, they might entitle the holder to a fixed dividend rate. They may also entitle the holder to a conversion into common shares (at a given ratio or formula). They can be used to give investors special rights or additional security in order to attract their investment dollars. Sometimes different types of shares, common or preferred as described as Class A or Class B (or Class C...etc) shares. There are no universal definitions relating to Class A vs Class B. For example, one company's Class A shares might be quite different from another company's Class A shares. The different classes permit companies to assign different rights to the shareholders of these securities, e.g. different classes may have different voting or liquidation rights." ... my emphasis

Comments for Share Capital

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Jan 26, 2015
Capital Share
by: Stanley

Dears Laura,

Thanks for your answer for my question.

What my concern is the potential taxation effect in long-run as you mentioned in your comment. However, this new small company neither has any minutes like a large company does, nor legal documents to regulate this. (The only document is Certificate of Incorporation which only stated "The Corporation is authorized to issue an unlimited number Class A and Class B shares.")

I just consulted an taxation manager with at least 10 years experience in corporate taxation. Per his opinion: as the capital gain on sale of a business is determined by PUC (i.e.$100 for capital share), the lower the PUC, the higher capital gain will be when the owners sell their business in future. On the other side, the lower PUC makes higher flexibility for owners when they withdraw their money from the "Due to Shareholder" account without changing the capital share amount.

If it is right, it means I can setup capital share value from $100 to the maximum owners' contribution amount ($150,000) depending on the owners need or taxation consideration. This makes me uncomfortable as I know something was missed right there - you are not supposed to setup capital share with this large range.

Hopefully someone with this experience can put thoughts here.

Thank you

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