You are a small business owner, and the thing that gives you legal ownership is your shareholding in your company. Anyone who owns the company’s shares has part ownership in the business and is entitled to receive dividends from the company’s earnings. You could be the sole shareholder of your company and later consider adding your spouse or other family members as shareholders or employees.
Rights of a Shareholder
Bringing family into the business has its advantages and complexities. If you employ your spouse, they have the right to be involved in the business operations and draw a salary. But if you make your spouse a shareholder, they have no right to make any operational, banking, or legal changes. However, they can participate in the company’s ownership, profit, and growth.
Hence, deciding on making a spouse a shareholder in the business has to be thought through various angles, like the nature of your relationship, spouse’s participation in the business, taxation, and shareholder structure. This article will touch upon these aspects to help you make an informed decision.
Tax Benefits
If your company is incorporated, adding a spouse as a shareholder has its perks. If your spouse is not actively involved in the business and has a lower taxable income, you can withdraw a higher amount from the business through dividends.
For instance, Mary is a musician and earns $40,000 a year, and Joey runs a clinic and earns $140,000 in business income annually. Instead of withdrawing the entire $140,000 in his name, Joey can add Mary as a shareholder and pay $50,000 in dividends. They both can show $90,000 each as taxable income and reduce their combined personal income tax liability as a couple.
The Participation of Spouse in The Business
The decision to make your spouse a shareholder depends on your spouse’s participation in the business. If you have a dependent spouse who is not actively involved in the business, the dividend from the company’s shares could act as a source of income for your spouse. In such a scenario, you could consider issuing non-voting, dividend-paying shares to your spouse and retaining ownership with yourself. A tax expert can help you create a business structure that ensures your spouse gets dividends regularly.
If your spouse is actively involved in the business and your business goals align with your spouse’s goals, you may share your company’s ownership. As an employee, your spouse draws a salary for the work done. You could issue voting shares with no rights to dividends to share the company’s ownership.
The Nature of Your Relationship with Your Spouse
The most important consideration of all is the nature of your relationship. You mix personal and professional relationships when you share the company’s ownership with your spouse. Any complexity in the personal relationship could extend to the professional space and vice versa. Moreover, joint ownership will limit your capacity to pursue investment opportunities as it would require the approval of both shareholders. While having a different skill set has advantages, it also creates dependency in decision-making.
Having your spouse as a shareholder is beneficial when your relationship with your spouse is cordial. If you separate from your spouse, company ownership could get complicated. The division of family property could involve the company’s ownership interest. However, you can avoid these complications by adding a specific clause to your shareholders’ agreement.
These are just a few considerations when deciding to involve family in the business. The shareholding structure and ownership can get complicated when you plan your estate. There could be several tax complications with the transfer of ownership. Avoid making such decisions in haste, as they could significantly impact your business.
Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with Shareholder Structure Planning
A professional business consultant is experienced in handling such scenarios and is well-versed in various business structures. Taking an expert’s help in strategic business decisions can go a long way and save you from costly mistakes. To learn about how Edelkoort Smethurst CPAs LLP can provide you with your business planning and strategizing, contact us online or by telephone at 905-517-2297.