When setting up a company, why are shares necessary?
Your corporation is a separate legal entity from anyone else. However, because it only exists on paper, it needs flesh and blood people in order to actually do anything. Ownership interest is decided by the shares that are issued by the corporation. The shareholders (the people who own the shares) own the corporation and usually determine the appointment of directors.
An owner must have shares. A director does not have to be a shareholder. Any shareholder can be a director.
Issue of shares
One of your corporation's first activities following incorporation will be to issue shares. A person becomes a shareholder when a corporation "issues" shares in that person's name. Unless you indicate differently in your articles of incorporation or by-laws, your corporation's board of directors can generally issue shares whenever it wishes, to whomever it chooses, and for whatever value it decides.
The corporation cannot issue a share until it actually receives fair market value consideration as payment for that share. This is generally in the form of money, although it can also be in the form of services or property given to the corporation. A person's payment for the share(s), in a form agreed upon by the directors, represents that person's investment in the corporation.
If you incorporate through a lawyer, they will issue the share certificates. If you incorporate yourself at the registries, you will need to use the do-it-yourself minute book binder, which has blank share certificates in it.
After issuing shares
Once a share has been issued, the shareholder is entitled to a share certificate. This certificate must state
- the corporation's name, as set out in the articles of incorporation
- the name of the shareholder
- the number and class of shares it represents
Dividends are paid from the corporation to shareholders, so if no shares are issued, dividends can't be paid out.
For more information on organizing your corporation and keeping it in good standing, learn more about business corporations.