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An entrepreneur is often defined as a businessperson. When it comes to a corporation, especially a start-ups, “entrepreneur” implies to take on many roles. We have heard the phrase « It takes all kinds to make a world ». It takes 3 kinds to create a corporation : a shareholder, a director and an officer. After explaining to you what are the differences between a federal incorporation & a provincial incorporation in Ontario in a previous article, Lex Start will now outline the protagonists of a corporation, explaining each one’s role in a mini-summary.
A shareholder in Ontario
Shareholders are persons (individuals or legal entities) who own shares issued by a corporation – hence the name “share-holder”. They invest in a company in exchange for shares.
Shareholders, in Ontario, are often wrongly perceived as the «owners» or the «bosses» of the corporation. Although they are directly related to the economic interests of the company, in reality, they only own shares and are only entitled to the rights provided by said shares.
Shares are securities issued by the corporation. As for startups, said shares often allow the corporation to obtain financing. By owning shares, shareholders obtain certain rights in regards to the corporation, such as the right to vote at shareholders’ meetings, to receive a portion of the profits made by the company and to receive a portion of the remaining assets of the company in the event of its liquidation. The rights that shareholders may or may not profit from depend on the class in which their share is listed.
As a start-up grows, it may seek financing or other kinds of partnerships in order to expand. Whether it is from relatives or qualified entities, investors will want, in exchange for capital, to acquire shares in the corporation.
In the event that the initial shareholders have entered into a shareholders’ agreement, the issuance of new shares will have to be made in accordance with the agreement, to which the new shareholders will be bond by.
Finally, it is important to highlight the fact that, subject to a shareholders’ agreement, the liability of shareholders is generally limited to the amount they have invested in the corporation. Unless fraudulent acts are involved, they can not be held liable for the debts of the corporation. Unlike directors and officers, shareholders, whether or not they own the majority of the shares, cannot act on behalf of the corporation.
Read our article about shareholders in a Ontario corporation to know more about their power & responsibilities.
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The director in Ontario
In Ontario, a director must be a natural person, who is more than eighteen years old, who has not been found to be incapable of managing property and generally incapable by a court in Canada or elsewhere. A director also cannot be in bankrupt status.
When it comes to federal corporations, the criterias are almost the same with one exception: the board of directors must be composed of at least twenty percent (25%) residents canadian. However, if a corporation has fewer than four directors, at least one of them must be a resident canadian.
It might be silly but the directors form the board of directors. Said “board” may even be composed of a single director. As one of the powerful stakeholders of the corporation, the board of directors takes the vast majority of decisions of the company.
For example, the board of directors may decide by resolution to create or amend the corporation’s by-laws. The directors are also the ones taking the decision to issue shares to shareholders or make banking arrangements. Subject to the existence of a previous shareholder agreement, directors are the individuals who transact almost every business in regards to the corporation.
Not surprisingly, such a significant amount of power comes with a certain source of liability. We have to remind ourselves that directors are subject to the obligations to act honestly, in good faith and to always keep the best interests of the corporation in mind. Therefore, according to section 132 (1) Ontario Business Corporation Act, directors must avoid putting themselves in a conflict of interest and have to disclose it right away if they ever find themselves into one.
Read more about the role of being a director in a Ontario company.
The officer in Ontario
An officer, in Ontario, is an individual appointed by the directors to be responsible for the day-to-day management of the company. Sometimes referred to as “inside directors”, officers may be a Chief Executive Officer (CEO), a Vice-president (VP), a Secretary, a Chief Financial Officer (CFO), a Chief Technology Officer (CTO), a Chief Compliance Officer (CCO) or any other title the board of directors has agreed on.
Once and if they are appointed, officers do not carry out the same duties as directors. Although they must act in accordance with the law and are, upon section 134 of Ontario Business Corporation Act, subject to the obligation to act honestly and in good faith, officers do not hold the power to vote on important decisions like directors. Accordingly, they are not held on the same standard of the directors’ liability.
Read more about the duties of the officers in a Ontario corporation.
As you can see, the question is not really who gets the title of “boss” within a corporation. The corporation is managed in concert between several actors to ensure that it operates in the most efficient way possible.
In the case of start-ups, usually one or a few people who take on the responsibility to be all at once the shareholders, directors and officers. Whoever decides to act alone to create a corporation will, however, have to keep in mind that each role he or she acts upon is distinct from one another.