The Anatomy of a Corporation

/ Business Law Corporate Law

There are a few reasons why one would need a corporation:

  1. They provide limited liability. This means that the corporation acts so that the shareholders do not normally exposed to personal liability when acting through a corporation.
  2. There are often very good tax benefits and lower tax rates to having a corporation.
  3. Having a corporation is more efficient when selling a business, rather than selling a business as a sole proprietor.
  4. There could be an enhanced level of credibility of a business as a corporation.

This article will discuss the items that make up the structure of a corporation.

Certificate and Articles of Incorporation

The Certificate of Incorporation is a one-paged document that shows the legal name of the corporation, the corporate access number, and date when the corporation came into existence.

The Articles of Incorporation are essentially the framework of a corporation. They contain the basic terms and provisions regarding the corporation’s operation. For example, if there is a limitation as to the kind of business a corporation can do, this information would be put in the Articles of Incorporation. Nonetheless, this sort of limitation is seldom used in contemporary practice. The Articles of Incorporation also determine the following points:

  • The number of directors allowed.
  • The registered and records address. This is the formal address by law for the corporation. For instance, if anyone needs to serve documents onto the corporation they will go to this respective address.
  • Restrictions on share transfer.

Articles of Incorporation usually have schedules. The first schedule typically contained the classes of shares. Realistically, there is no limitation on the number of classes a corporation may have. To be a share, a share must include at least one of the three basic rights associated to shares:

  • Voting: which is often associated with a common share as opposed to a preferred share.
  • Dividends: these are frequently used for investment purposes.
  • Participation: the right to share in the net asset value of the corporation, when the corporation is being dissolved.

A sample Share Certificate

A sample Share Certificate

Who are Directors and Shareholders?

It is important to distinguish between a director and a shareholder. The shareholders are the owners of a corporation, and the directors are the managers. The directors have a duty to manage and act in the best interest of a corporation. In many circumstances, such as a small business, the directors and shareholders can be the same individuals, but this does not have to be the case. Generally, shareholders do not contract personal liability for the actions of a corporation. However, directors can sometimes be subject to director liability.

Examples of Director Liability

  • The issue of shares for considerations other than many when the consideration is worth less than what the corporation would have received if the share was issued for money.
  • The payment of an unreasonable commission on a sale of shares.
  • Indemnification of a director or officer contrary to the Business Corporations Act.
  • Unpaid wages up to six months.
  • Non-payment of certain taxes, such as GST and employee tax remittances.

Who are Officers of a Corporation?

While there are directors and shareholders of a corporation, there are also officers. All directors, by virtue of holding this position are automatically officers of a corporation. It is common to appoint three officers, the President, the Secretary, and the Treasurer, from the board. The President is usually the head of the Board of Directors, the Secretary is in charge of the minutes, and the Treasurer is in charge of the finances.

Bylaws

The bylaws serve as the internal rules for the corporation, meetings, proxies, and day-to-day secretarial management of a corporation. Topics in the bylaws may include: director’s meetings, director’s elections, the responsibilities of Officers, dividend payments, and shareholder voting procedures.

Returns, Resolutions, and Registers

Annual Returns: must be filed every year, declaring to the Corporate Registry who are the Directors and Shareholders of the corporation.

Resolutions: are the written record of the director’s decisions. There is also a duty to maintain proper minutes for meetings of the directors and voting shareholders. These are necessary as it is important to have proper written record of the decisions being made.

Share certificates and register: are issued to the shareholders, and they state the number and class of shares has issued, the name of the shareholder, the date of issue, and the share certificate number. Any corporation must maintain appropriate share ledgers and registers, to record the shareholders of the corporation, and what specific shares they hold.

Extra-Provincial Registration

The Business Corporations legislation for most provinces determines that if a corporation does business in another province, it must register in that province. For example, if an Albertan consulting company that provides consulting work to a few clients in British Columbia, it is essential to extra-provincially register in British Columbia. This means that the corporation would have to appoint an agent office in British Columbia. Typical examples are accountant’s or lawyer’s offices who simply receive formal notices for the corporation.

Unanimous Shareholders Agreement (USA)

It is highly advisable to have a unanimous shareholders agreement if there is more than one shareholder. This serves as a collection of rights and responsibilities of the shareholders and governs how the shareholders deal among themselves and with third parties.

Common terms in a USA include:

  • Right of first refusal;
  • Forced sale on death, disability and divorce;
  • Buy, sell or shotgun provisions; and
  • Drag and tag along rights.

Stay tuned for our next blog post on Unanimous Shareholders Agreements.