Turning Family Loans Into a Proper Share Structure

The situation

Zainab worked full-time in a warehouse in Mississauga, picking and packing overnight shifts. On the side, she had built a small resale business, sourcing overstock goods and reselling them online. What started as a way to make extra money on weekends had, over about two years, grown into something that brought in roughly $100,000 a year in revenue.

She had not done it entirely alone. Early on, when she needed cash to buy a larger batch of inventory, her brother-in-law Andriy, a long-haul truck driver, had transferred her about $8,000 with a promise to pay it back once the business turned a profit. A few months later, a friend, Taras, put in another $6,000 on similar terms. Neither transfer was documented beyond a text message thread agreeing that they would "get their share back once things took off."

Things did take off. By the time Zainab came to Treadstone Law, the business was outgrowing her kitchen table and her informal bookkeeping. She wanted to incorporate, both for liability protection and to look more credible to suppliers, and she wanted to finally sort out what she owed Andriy and Taras. She was also clear about one thing: she had built the business, she made every operational decision, and she did not want either of them to end up with a vote in how it was run.

The problem

The difficulty was not whether Andriy and Taras deserved something back. It was that "get their share back" had never been defined. Was it a loan with interest? A percentage of profits forever? A one-time bonus once the business hit a certain size? None of them had agreed on an answer, because none of them had thought they needed to at the time.

Left alone, that kind of ambiguity tends to surface at the worst possible moment — usually when the business is doing well enough that everyone suddenly has an opinion about what they are owed. If Zainab simply incorporated and issued ordinary shares to Andriy and Taras in exchange for their earlier contributions, she would be giving them a permanent ownership stake, voting rights on major decisions, and a claim to a fixed slice of every future dividend, whether or not the business could support it. If she instead tried to just pay them back as informal loans with no documentation, she would leave herself exposed to a dispute later about how much interest, if any, had been promised, and whether the payments were loans at all rather than investments.

There was also a fairness question buried in the numbers. Andriy had put in $8,000 and Taras $6,000 — not equal amounts, and not made at the same point in the business's growth. A structure that treated their contributions identically, or that locked in a fixed percentage return regardless of how the business performed in a given year, would not reflect what had actually happened. Zainab needed a way to repay each of them roughly in proportion to what they had risked, on a schedule the business could actually afford, without turning either of them into a co-owner with a say in day-to-day decisions.

What we did

1. Confirmed the nature of the original contributions. Before drafting anything, we asked Zainab, Andriy, and Taras to agree in writing on what the $8,000 and $6,000 had actually been: investments in the business in exchange for a future return, not loans carrying a fixed interest obligation. That distinction mattered, because a loan has to be repaid on its terms regardless of whether the business is profitable, while an investment can be tied to the company's actual performance.
2. Incorporated under the Ontario Business Corporations Act with more than one class of shares. Rather than issuing one type of share to everyone, the articles of incorporation created three classes: common shares carrying full voting rights, held entirely by Zainab, and two separate classes of non-voting shares, one for Andriy and one for Taras, each entitled to dividends but with no say in how the company was managed.
3. Made the dividend rights discretionary rather than fixed. Instead of promising Andriy and Taras a guaranteed percentage every year, the share terms gave Zainab's board — which was just Zainab, as sole director — discretion to declare a dividend on one class of shares without being required to declare an equal dividend on the others. That flexibility meant she could direct more of a good year's profit toward paying down what Andriy and Taras were owed, and pause or reduce dividends in a slower year, without breaching any promise to either of them.
4. Set a target payback figure for each investor tied to their original contribution. Rather than an open-ended ownership stake, the shareholder agreement set an amount for each of Andriy's and Taras's shares that, once paid out through dividends, would trigger the company's right to redeem — buy back — those shares at a nominal price. This turned what had been a vague verbal promise into a defined, self-limiting arrangement: once each of them had received back roughly what they had put in, plus a return reflecting the risk they had taken, their involvement in the company would end cleanly.
5. Documented everything in a unanimous shareholder agreement. Alongside the articles, we prepared an agreement signed by all three of them, setting out the redemption trigger, what would happen if the business was sold before either investor was fully repaid, and confirming that neither Andriy nor Taras had any right to participate in management or demand financial records beyond an annual summary.

The outcome

The structure gave Zainab exactly what she needed: a way to acknowledge and repay the people who had backed her early, without handing over any control of a business she had built through her own work. In the first year after incorporation, the company declared a discretionary dividend on Andriy's shares only, reflecting a stronger quarter for the product line his contribution had originally funded, while Taras's shares received a smaller dividend the following year once a different batch of inventory sold through.

Because the share terms had been drafted to allow that kind of uneven, performance-based treatment from the outset, there was no question of one investor being shortchanged relative to the other — the agreement they had all signed anticipated exactly this. Both Andriy and Taras understood going in that their return was tied to how the business actually performed, not to a fixed number that might strain the company in a weak quarter.

This is a legitimate and fairly common use of multiple share classes in a small, family-funded corporation. Ontario corporate law allows a company to create classes of shares with different voting and dividend rights, and to give directors discretion over which class receives a dividend in a given year, as long as the rights are properly set out in the articles of incorporation and applied consistently with those terms. The risk that arises with this kind of structure is not the structure itself, but using it to disguise what is really an equal partnership as something smaller, or to let a controlling shareholder treat minority shareholders unfairly once the business succeeds — conduct that can expose a company to a shareholder oppression claim in Ontario. Because Zainab's structure reflected what had actually been agreed, and because the discretion was documented and exercised in a way consistent with the shareholder agreement, it held up exactly as intended.

By the time the business crossed roughly $100,000 in annual revenue, Andriy had been fully repaid and his shares redeemed under the terms of the agreement. Taras remained a small non-voting shareholder, on track to reach his target payout within the following year. Zainab retained full voting control throughout.

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