It’s likely you’re closely involved in the company’s management when you’re a small business shareholder. You’ll often be required to approve the decisions in relation to the businesses’ goals and overall performance.
“As a shareholder of a small business, you’ll need to consider issues outside of just running your business, including how you’ll be compensated, which may mean payment as dividends or salary, and what will happen when you pass away,” explains Andrea Armitage, Manning Elliott partner.
Shareholders’ agreement
It’s prudent that any business with more than one shareholder has a shareholders’ agreement, a binding contract between each person, which acts to govern the relationship among the part-owners of the company.
“A shareholders’ agreement formalizes what can otherwise be an informal arrangement, especially with family businesses—small businesses can be pretty informal,” says Manning Elliott partner Sheryne Mecklai. “By setting up a shareholders’ agreement, you are thinking through a lot of governance issues that won’t necessarily come up when you start the business.”
Uncertainty and disagreements can arise quickly, and without a robust shareholders’ agreement, it’s likely to cause disruption that may amount to costly resolution.
“In the beginning, you’ll be focused on the growth and running the business, so when issues arise, you want to have a plan in place to solve problems. Also, keep in mind to revise it as necessary,” Mecklai reaffirms.
“At some point, you may want to exit the business,” says Armitage. “If your agreement includes a clause on a buy-out or buy-sell agreement, it will clarify everyone’s wishes in terms of those transactions, particularly if there’s more than one company shareholder.”
Succession planning is also an important item to include, which can answer questions like, in the event a shareholder passes away, will the remaining shareholders be obligated to buy out the interest, and will there be life insurance available to fund a buy-out? It can also address who will get to remain as shareholders.
Shareholder compensation
Whether you choose dividends or salary, each affords different benefits, depending on what suits your current personal and business situation.
Mecklai breaks it down: “When you take a salary, typically you withhold remittances paid directly to CRA, so there’s no surprises at the end of the year. Plus, you increase RRSP room, with a dividend you do not.”
Armitage adds, “For dividends, it’s important to speak to your advisor and get that tax estimate so you know what to expect when it comes time to file your personal tax return.”
“It’s also important to look at the big picture,” advises Armitage. “As a shareholder, you might have other things going on where a salary may be a better choice or vice-a-versa; it’s not just looking at each in isolation, but rather together.”
Tax-efficient corporate structure
A tax-efficient business structure can save the business taxes and improve the bottom line.
“A lot of people incorporate their business at the start, but as the business grows or as your family life becomes more complicated, you’ll want to ensure it’s set up efficiently,” says Mecklai.
She recommends you ask yourself these critical questions to be your most effectual:
Are you taking advantage of the most tax opportunities?
Have you structured the business so you can claim your capital gains exemption?
Are you organized in a way to ensure you understand the impact of the tax bump split income rule?
Are you set up in a way to deal with different income and revenue sources, and have you ensured they are separated, if necessary?
Pre- and post-mortem planning
Armitage and Mecklai reveal what happens to a shareholder’s estate when they pass away. Considerations to be mapped out in advance include:
“How will the tax bill associated with their shares be funded? Is life insurance required for the shareholder and/or the company, and does the company need to sell its assets and stop operating to pay the shareholder’s tax bill?”
“We’ve encountered situations where they’ve had to liquidate everything or they borrowed in such an urgent manner they paid a very high cost to that borrowing. Ultimately, the cost of not planning is quite expensive.”
For more information, visit manningelliott.com.
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