By Michelle Collins | August 31, 2002
Your company has a name, you've filled in all the forms and had them accepted by the governmental Ministry, you're officially incorporated. Now what? Along with tax and strategic advice, you must follow an official procedure with requirements that vary from province to province. You should ask your lawyer and accountant about the specifics for your jurisdiction. A few basics, however, are requisite no matter where you operate in Canada.
Every non-offering corporation (i.e. a corporation not offering its securities to the public) must have at least one director. In small businesses, the director commonly is also a shareholder and officer of the Corporation, although each position has its different rights and responsibilities.
In many jurisdictions, the articles of incorporation, filed to create the corporation, name the initial director(s). These initial directors hold office until the first meeting of shareholders, although there is nothing that prevents the initial directors from being elected at the first meeting of shareholders and so to continue thereafter.
"Directors have, by legislation, been given the task of managing or supervising the management of the corporation," says Elliot Rand, a partner with Elkind, Lipton & Jacobs law firm in Toronto, Ontario. These people effectively have the duty and obligation to act in the best interests of the corporation. In addition to managing or supervising the management of the corporation, applicable legislation gives the directors numerous other rights and obligations. Some of these include: director(s) rights to authorize the issuance of shares at such time and to such persons and for such consideration as the director may determine appropriate; the right to declare dividends; the right to appoint and remove officers; the right to authorize the corporation to borrow monies and grant security therefore; and numerous other important issues.
Shareholders vote to elect the directors. The only time this doesn't happen is upon the initial incorporation, as no shareholders exist yet and the initial director(s) is/are the individual(s) set forth in the Articles of Incorporation. Subject to the requirements in certain jurisdictions to have at least three (3) directors in an offering corporation and to certain Canadian residency requirements for directors, the shareholders can decide to set the number of directors to be elected from time to time at as many or as few as they like, provided such number of directors to be so elected is within the minimum and maximum number of directors stated in the corporation's articles, unless a fixed number of directors is stated in the then current articles of the corporation, in which case only that fixed number of directors may be elected.
Shareholders buy the company shares. In many jurisdictions, the shares will only be validly issued at law if money equal to the amount determined by the directors has been fully paid, or past services which have been valued by the directors have been provided, to the corporation, says Elliot Rand. If you are a small business owner who wants to keep your corporation privately owned, you could satisfy this desire by acting as the sole director and issuing shares to yourself only. The amount to be paid for these shares is up to the directors' determination.
"Shareholders effectively own the corporation and the profits that the corporation may earn, after payment of all debts and liabilities," says Rand. Shareholders hold a number of other rights as well, which include the right to receive dividends if and when declared by the directors, the right to elect and remove directors, and the right to approve whether or not all or substantially all of the assets of a corporation should be sold.
Directors may hire or appoint officers to oversee the daily business operations of the Corporation. In large corporations, where the directors may not be present every day, officers are expected to carry out the day-to-day functions. Officers can include a President, Secretary, Treasurer, CEO, CFO, and so on. In small businesses, a director and an officer can be, and very often is, the same person.
With all these titles and responsibilities, who's running the company, the shareholders or the directors? Going back to Rand's definition, shareholders are the owners of the corporation. If you are a small company, it is likely in your best interest to hold on to more than 50% of the voting shares to maintain control. By holding onto a majority of the voting shares, you will be able to control who the directors of the corporation will be. Since it is the directors that effectively are charged with the responsibility for managing or supervising the management of the corporation, you want to ensure that you are in a position to ensure who those directors will be (which, as we said earlier, could be the shareholder himself/herself).
The officers of the corporation are appointed and, when necessary, fired, by the board of directors.
Corporate legislation requires that, after you incorporate, a meeting of the directors of the corporation be held at which the directors may pass by-laws. According to Rand, by-laws will often deal with details as to: (a) when, where and how directors and shareholders meetings should be held; (b) when and how directors or shareholders will be notified of meetings; (c) who will chair these meetings; (d) how many directors or shareholders must be present at a meeting to constitute a quorum; (e) what percentage of votes are needed to be cast to determine any question; (f) how many officers or directors are required to sign a given document; (g) matters dealing with shares; and with various other issues.
One of the many requirements of a corporation is to hold an annual general meeting (AGM). You may have set a date for these meetings in your bylaws. If not, legal requirements vary from province to province as to when these meetings must be held. In Ontario and Saskatchewan, for example, the first meeting must be held within 18 months of incorporation and every 15 months afterwards.
So what makes these meetings different? "First, the directors will receive the financial statements, approve them, and then give them to the shareholders for their review as required by the applicable legislation. These financial statements, which must be prepared in accordance with generally accepted accounting principles, must also be presented at the annual meeting of shareholders, together with the report of the corporation's auditor, if any, and such further information as may be required under the corporation's articles, its by-laws or any agreement that may be had amongst all the shareholders. They very often also will consider whether to consent or approve the acts that the directors took between that general meeting and the previous general meeting," says Rand.
Everyone in your corporation who is a shareholder or director will sit down and go over the profits and losses of the company. From there, you can evaluate how well the directors are doing and decide on their successor if they are to be replaced. As a small business owner, you likely will know firsthand how your corporation is doing financially. You may even discuss it regularly with your fellow shareholders, if you have any; however, you must have at least the official shareholders meeting required by your applicable legislation.
The minute book is a record of everything that happens at shareholders and directors meetings. If shareholders decide to elect new director(s), if directors authorize the issuance of shares, or declare dividends, it is all written in there. The first action at each meeting is to approve the minutes of the last meeting, says Rand.
This might all seem silly if you have been running a very small corporation and know all this without having to refer to a book. But, what if you decide to sell your business and the purchaser's lawyer asks to see this minute book? "You'll find many small businesses where they haven't had a general meeting or minutes done for years. It happens all the time. If you want to sell your business, the purchaser's lawyer asks to see the minute book and there is often very little in there other than the articles of incorporation, and sometimes the original resolutions. At that point, there is a mad scramble to correct it all and try and catch up for all the past years," says Rand.
While you don't need to record general discussion or small talk in minutes, recording all decisions taken is essential. These minutes may be the only official record for an issue that was decided and is later disputed. Once the minutes are approved, they are considered an official record of the company's actions.
If you do not want to hold formal meetings and can get everyone who is entitled to vote on a particular issue to agree in writing, you can use written resolutions. These resolutions can take the place of a meeting and are equally as valid as a meeting in many jurisdictions, says Rand. "Written resolutions presented to the directors or shareholders of a corporation, provided that they're signed by everyone who would have been entitled to vote on that issue had a meeting been held, are, in many jurisdictions, as valid as if a meeting was held," says Rand.
If you fail to meet your responsibilities in running a corporation, shareholders can take legal action against the corporation and, in certain circumstances, its directors.
"The (Business Corporations) Act does provide for relief to various parties where a corporation is not complying with the legislation governing it. Various rights and remedies are provided to cause compliance to occur. It can, however, sometimes be a long and expensive process to obtain such relief," says Rand.
The foregoing is not an exhaustive review of the subject matter. Always consult your lawyer before proceeding with any of the foregoing.