In my last post on this topic, I previously discussed how to form a new Canadian corporation. In this post, I’ll go into a little more detail on what happens once you’ve incorporated, and the rights and duties of the three main groups of the corporate structure: shareholders, directors, and officers.
Before we get started, the usual disclaimer: I am not a legal expert, and this article in no way constitutes legal advice. It’s possible that this article contains factual errors or omissions. Follow this advice at your own risk, and do your own due diligence before taking any action.
Initial meetings and resolutions
When you incorporated, you listed an initial set of directors. These directors remain in place until the first meeting of shareholders, at which time the shareholders elect the new set of directors. This meeting must be called within the first 18 months after incorporation.
You’ll also be working with some internal documents, such as the corporate minute book and the corporation’s financial statements. You need to keep these documents up to date, but you can also keep them at your primary place of business.
Early on in the life of the corporation, the directors may also hold an “organizational meeting”. At this meeting, the directiors can pass corporate by-laws, appoint officers, issue shares, make banking arrangements, and more. These resolutions must be recorded in the corporation’s minute books.
The directors also need to appoint the officers of the corporation. Officers are responsible for the day-to-day operations of the business.
Here are some important points from the 2011 Guide to Federal Incorporation that you should be aware of:
- One person may act as a director, officer and shareholder at the same time. In many small businesses, one individual is the sole director, the sole officer and the sole shareholder.
- In a small business where one or two people act as directors, officers and shareholders, meetings are not necessary. Shareholders in these corporations often prefer to act through written resolutions.
- If the directors change, the corporation must file the Changes Regarding Directors form with Corporations Canada within 15 days of the election.
The latter changes can be filed online at no additional cost.
Keeping your corporation in good standing
It’s important to keep your corporation in good standing. Otherwise, it may be dissolved by Corporations Canada! Here are the important points:
- An annual return must be filed every year. This is not your tax return.
- The fees must be paid. It’s $20 to file an annual return.
- You must notify Corporations Canada of a change of registered office.
- You must also notify Corporations Canada of a change regarding the directors.
You can always obtain a Certificate of Existence or a Certificate of Compliance, should a bank or other party ask for it.
Other obligations of the corporation
A corporation has duties to its shareholders. Even if you are a shareholder, director, and officer all in one, you still have duties to yourself that need to be recorded and fulfilled.
Among some of the things that you need to keep track of:
- Meeting minutes and resolutions.
- All official documents, such as the Articles of Incorporation.
- Corporate by-laws, a share register, accounting records and financial statements. The shareholders have the right to view these financial statements.
Shareholders may also request that the corporation appoint an auditor.
The corporation must hold a shareholder’s meeting within 18 months of incorporation, and it must also hold each subsequent meeting every year, and no later than 15 months after the last meeting. In place of a meeting, the shareholders can also agree to a written resolution. This also needs to be kept in the corporate records.
Usually, the annual meeting should be held somewhere in Canada. However, if all the shareholders agree or the corporation’s articles allow, this meeting may be held anywhere.
Now that you about the general requirements of a corporation, let’s look at the three main groups: directors, shareholders, and officers.
The rights and responsibilities of directors
Anybody can be a director, so long as:
- They are at least 18 years of age.
- Of sound mind.
- Not bankrupt.
Usually, at least 25% of the directors must be Canadian. In addition to the previously-mentioned rights and responsibilities, directors also have the following duties and liabilities:
- Duty of care. Directors must at all times act honestly, in good faith, and in the best interests of the corporation.
- Remaining informed. They must be aware of what the corporation is doing, as they are liable for its actions!
- Preventing conflicts of interest. Directors and officers must disclose in writing any personal interest they may have in regards to a contract with a corporation. Otherwise, the contract can be annulled by a shareholder or the corporation.
- Up to six months of unpaid wages to employees.
- Unpaid sales taxes.
- Unpaid source deductions.
The rights and responsibilities of shareholders
As the owners of the corporations, shareholders have rights upon the directors, officers, and the corporation. They can elect and dismiss directors, approve by-laws, appoint an auditor, and demand to see corporate records. Shareholders are also limited in liability to the amount they paid for their shares.
Shareholders influence the corporation by passing resolutions. There are three types of resolutions:
- Ordinary resolutions. These require a simple majority in order to pass.
- Special resolutions. These need a two/thirds majority. Examples of these including changing the corporation’s name or divesting all of the corporation’s assets.
- Unanimous resolutions. If even a single shareholder disagrees, these cannot pass. An example of an unanimous resolution is the decision to not appoint an auditor.
These resolutions are passed at shareholder’s meetings, or by written resolutions signed by every shareholder.
Shareholders may also enter into a shareholder agreement. These agreements include taking on the rights and duties of the directors, although in this case, the shareholders would also be taking on the liabilities of the directors as well. The 2011 Guide to Federal Incorporation goes into much more detail on the types of agreements that shareholders can arrange with each other.
The rights and responsibilities of officers
Officers of the corporation are appointed by the directors, and their duties and responsibilities are also assigned by the directors. The same duties and obligations of a director apply equally to the officers of the corporation.
The reporting and paperwork requirements of a corporation may seem more onerous, but it’s really not as bad as it seems, especially if you are a self-controlled corporation or you run the corporation with a partner you can fully trust, such as your significant other. In that case though, I recommend that the primary partner maintain 51% or more of share ownership in order to maintain primary control. Otherwise, you could run into tie deadlocks, which will prevent things from getting done.
What are your thoughts on incorporating? Is it worth it? If you live outside of Canada, what is incorporation like in your country?