The Nature of a Corporation: operating your business in an incorporated company.

I was sending a letter out on a corporate file recently, and it crossed my mind to post about matters which should be considered if a person is in any way involved with a Corporation, keeping in mind the distinction between individuals and the separate legal entity and nature of the Corporation concept.

Nature of Corporation

Often I hear persons say, “they are the owners of the business”. Then I find out that, in fact, a company, in respect of which the person is a shareholder, owns the business.

The whole point behind incorporation is to ensure that “no person is the owner of the business” and therefore no person has liability — hence the term “Limited” or “ Ltd.” for limited liability; or “Inc.” or Incorporated or “ Co.” meaning a separate entity.

A person holding themselves out as “the Owner” may in fact create personal liability for themselves!

Care must be maintained to always use the full name of the Company on all documents, invoices, cheques and correspondence. Not doing so, using some shortened version out of laziness, may create personal liability.

Shareholders

Shareholders have certainty rights, if the shares as defined grant such rights, such as:

• the right to be involved in the election of officers and directors

• the right to dividends

• the right to any remaining on a wind up of the company and payment of creditors’ claims.

There can be various classes of shares, each class holding different rights.

Although the nature of the limited liability concept is the foundation of the legal principle relating to corporations, often creditors or lenders to the Company may require a personal guarantee of financial obligations by a shareholder, thereby re-creating some personal liability

Directors

Directors are the decision-makers of the company, and are elected by shareholders.

Although shareholders have the limited liability, directors have possible liabilities for the affairs of the company, including but not limited to: Revenue Canada Employee income tax withholdings, GST, and WCB payment obligations.

Depending on the jurisdiction’s employment legislation, directors may be liable for some employee wages,

Also, if in the course of business representations are given to third parties, upon which third parties rely, the person giving the representations (directors or officers, or shareholders, or employees) may by doing so create personal liability to themselves.

Further, one cannot escape liability for fraud or false statements, by claiming the defence that these activities were done by the corporation, if one was involved in some way in the fraud or false statements. Care must be taken.

Officers

Generally speaking the officers are the persons who implement the directions, policies and business activities approved by the directors, and through such directors by the shareholders.

Officers have possible liabilities for the affairs of the company including but not limited to: Revenue Canada Employee income tax withholdings, GST, WCB, employee obligation; and as set out above, for fraud claims.

Minute Book and Corporate Registry

The Corporate Minute Book, containing all the important corporate documents (the constitution, By-laws, any shareholder agreement, records of shareholders, records of officers and directors, and important corporate decisions (Minutes and Resolutions) is a fundamental requirement of a corporation.

This Corporate Minute Book must be kept up to date, and must record all the aforesaid “governing “ documents.

The government’s Corporate Registry records should reflect the Minute Book, and do not stand alone. Often the Corporate Registry records may not be up to date, so these are not the governing records. One must review the Minute Book.

Importantly, each year an Annual Return must be filed, updating the directors of the company, and any major changes over that year.

Failure to file the annual returns at Corporate Registry shall result in the dissolution of the company after some deadline.

Dissolution is akin to a “death” of the company, which is problematic if the shareholders/officers/directors wish to maintain limited liability, and wish to maintain any tax benefits of a company.

The Corporate Minute Book should be kept at the Registered Office of the Company

Registered Office

The Registered Office is important, since this is where legal documents may be served against the Company, binding the Company.

For this reason, it is most appropriate to ensure the registered office is at a law firm, although that is not a legal requirement (at least in some jurisdictions) .

Often when the registered office is not a legal office, legal documents go unattended, and a Company may find that a judgment or some other act has occurred against the Company simply because no one responded to properly served documents at its registered office. As a result, not using a law firm creates risk.

Corporate Matters

It is important that you have an understanding regarding the legal nature of a corporation, and the various legal relationships of its principals to the Company, such as:

• as Shareholder

• as Officer and as Directors

• as Creditors (for example- shareholder loans),

• as Secured Creditors (a principal may take security against the Company for monies owing),

• as Employees, and

• as Guarantors.

Other Corporate Issues

There are other “corporate” issues that ought to be considered, and perhaps put in place, such as

• Shareholder Agreements

• Shareholder Loan and Security Agreements

• Employment Agreements

• Indemnity Agreements

• Management Agreements

At times it is useful to consider:

• Shares may be strategically held in a “discretionary” trust (often called a family trust).

• Reasons to have classes of shares

• Directors’ “errors and omission” insurance

• “Key Man” life Insurance

Outro

I post the foregoing to raise awareness of the many considerations in respect of which persons involved in any way with corporations should be aware.

Having read the above, and if it applies to you, I suggest you canvass these topics with a lawyer in your jurisdiction.

- Clive Llewellyn M.A., LLB — Barrister and Solicitor