Splitting a Family Side Business Into Proper Share Classes

The situation

Parisa worked full-time as a line cook. On weekends, she and her sister Niloufar, who worked as a landscaper, ran a small meal-prep and event catering operation out of a rented commercial kitchen in Orillia — trays of food for backyard parties, corporate lunches, and the odd wedding. It started three years earlier as a way to make extra money. By the time they came to Treadstone Law, it had grown into something closer to a real business, with roughly $100,000 in annual revenue, a handful of regular corporate clients, and enough steady work that both sisters were weighing whether to leave their day jobs.

The business had never been incorporated. Parisa and Niloufar split profits informally, roughly down the middle, and kept records in a shared spreadsheet. Their father, Abdi, a landscaper himself, had lent them about $8,000 for equipment when they started — a used commercial oven, prep tables, delivery coolers — and had never been paid back in cash. Instead, the understanding in the family was that he was "part of the business," though nobody had ever written down what that meant in practice.

As revenue climbed, the sisters knew they needed to incorporate. Operating as an unincorporated partnership meant their personal assets — Parisa's car, Niloufar's small home equity line — were exposed if a client ever got sick from a catered event or a delivery van caused an accident. A corporation is a separate legal entity that can own the business, sign contracts, and be sued in its own name, which shields the people behind it from most business liabilities. That protection was the immediate reason they called us. The share structure question came second — and turned out to be the harder part.

The problem: what does Abdi actually own?

Incorporating is straightforward on paper: file articles of incorporation, issue shares, appoint directors. The complication was that three people had three different mental models of what "the business" owed each of them.

Parisa and Niloufar wanted to be the operating owners — the ones making day-to-day decisions, since they were the ones cooking, driving, and managing clients. But they also wanted to set up a family trust that could eventually hold shares in the corporation, so that if the business kept growing, income could be split among family members in a tax-efficient way, and future family members — children not yet born, or a parent in a lower income bracket in a given year — could be added as trust beneficiaries without restructuring the company each time. A family trust is a legal arrangement where a trustee holds property, including shares, for the benefit of named beneficiaries, and a discretionary family trust lets the trustee decide each year how income is distributed among those beneficiaries.

Abdi's expectation was different and, from his point of view, simpler: he had put in real money at the start, at real risk, when the business was nothing but a rented kitchen slot and a folder of recipes. He believed that entitled him to an ownership share proportional to a founder, not a lender — he mentioned a number in the range of a third of the company, based on nothing more than a sense of fairness rather than any written agreement or valuation.

Nothing had been documented. There was no loan agreement, no promissory note, no shareholder agreement, and no minute book. Under Ontario law, an unwritten understanding between family members about future business ownership is very difficult to enforce, but it is also very difficult to simply dismiss when the person who believes it exists is a parent who helped fund the venture and expects to be treated fairly. Our role was not to decide who was "right." It was to help the family translate three different expectations into a share structure that could actually be built, and that all three people could sign.

What we did

1. Separated the loan question from the ownership question. The first step was pulling apart two things the family had blurred together: Abdi's $8,000 contribution was a loan, and repaying a loan is not the same as earning equity. We had the sisters formalize it as a demand promissory note bearing modest interest, which gave Abdi a clear, enforceable right to be repaid regardless of what the company's shares ended up looking like. That alone lowered the emotional temperature — his money was no longer tied up in an argument about control.
2. Explained what share classes actually do. Many small corporations issue only one class of shares, where every shareholder has identical voting rights, identical rights to dividends, and identical rights if the company is ever sold or wound up. That structure works poorly for a family business with mixed goals. We recommended articles of incorporation authorizing multiple classes: one class carrying voting control and rights to dividends, reserved for the sisters as operating owners, and a second, non-voting class designed to receive dividends without any say over daily decisions — the class suited to a passive stakeholder or a family trust.
3. Built the family trust as a separate, later step. Rather than making the trust a shareholder on day one, we advised setting it up once the corporate structure and share classes were already in place, with a trustee — Parisa, in this case, acting independently of her role as an operating shareholder — administering it for a defined class of family beneficiaries. We explained plainly that income-splitting through a family trust is subject to specific rules under the Income Tax Act that limit how dividends can be allocated to certain family members, particularly if they are not actively involved in the business, and that this is an area where our corporate advice needed to be paired with an accountant's tax advice before any dividends were actually paid out.
4. Negotiated Abdi's actual stake. With the loan resolved separately, the remaining question was whether Abdi should hold any shares at all. The sisters did not want him voting on business decisions; Abdi did not want to walk away from three years of feeling invested in something he'd helped start. We proposed a modest direct holding in the non-voting class — enough to give him a real, ongoing financial interest in the company's success, with a right to see annual financial statements, but no vote on hiring, pricing, or expansion decisions.
5. Drafted a shareholder agreement covering the gaps. A shareholder agreement is a contract between the owners of a corporation that sits alongside the articles of incorporation and governs things the articles don't — what happens if a shareholder wants to sell their shares, what happens if a shareholder dies, and how disputes get resolved before they reach a lawyer's office. We built in a buy-out mechanism specifically for Abdi's shares, so that if the relationship ever became unworkable, either side could trigger a fair-value buyout instead of a standoff.

The outcome

The company was incorporated with two share classes: voting common shares split evenly between Parisa and Niloufar, and a non-voting class used first to give Abdi his negotiated minority stake and structured to accommodate the family trust later. Abdi's $8,000 was documented as a loan and repaid over the following year out of business cash flow, separate from any dividend he received as a shareholder.

Nobody got everything they initially asked for, and that was the honest outcome, not a failure of the process. Abdi ended up with a smaller ownership percentage than the number he had first mentioned, and he had to accept that he would never vote on how the business was run. Parisa and Niloufar had to accept that their father would remain a shareholder indefinitely rather than simply being paid back and stepping away, and that they owed him annual financial disclosure whether the year was good or bad. The family trust was established roughly six months later, once the sisters' accountant confirmed how dividend allocations to trust beneficiaries would actually be taxed, and it now holds a portion of the non-voting shares for the benefit of a small group of family members named by the sisters.

The catering business has since added a second commercial kitchen slot and taken on part-time staff. The share structure has not needed to be revisited, which is really the measure of whether this kind of negotiation worked — not that everyone got their first ask, but that the paperwork has been able to sit quietly in a drawer while the business gets on with actually operating.

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