What are Shares?
When you incorporate a business, it is divided into portions of ownership, called shares (also referred to as stocks). Shares are distributed among shareholders and each unit is assigned a monetary value, as well as certain rights. Proof of share ownership is represented through a share certificate.
Share Classes
Share classes are different groups of shares that grant specific rights or privileges to a shareholder.
These rights may include:
- Voting rights: whether a shareholder can vote during meetings on managerial issues, such as who will be a director.
- Dissolution rights: whether a shareholder is entitled to proceeds from the remaining assets if the corporation dissolves.
- Dividends: whether a shareholder is entitled to dividends from the company’s profits.
What is the difference between Common Shares and Preferred Shares?
Preferred shareholders may be promised fixed dividends at regular intervals in priority to common shareholders if the corporation performs well.
Preferred shareholders will also usually be paid a fixed price, per share, out of the remaining proceeds upon dissolution in priority to the common shareholders, who will share what is left over, if any. Some preferred shares are redeemable (can be purchased or sold at a certain price) at the option of the corporation, the shareholder, or both.
Common shareholders are afforded the right to vote. Often, preferred shareholders are not.
Lastly, common shares have potential to increase in value if the company experiences growth, whereas the price of preferred shares won’t change much.
Most small businesses should only be issuing common shares. Preferred shares are usually only used on the advice of accountants to take advantage of tax savings. Depending upon your jurisdiction, LawDepot creates a share structure with at least the following:
- Class A Common Voting Shares
- Class B Common Non-Voting Shares
Who Runs a Corporation?
Internal management in a corporation is structured. At a basic level, there are three types of individuals you need to identify during your incorporation.
Shareholders
Shareholders can be individuals, companies, or organizations that owns equity or shares in a corporation. They are not personally liable for the debts and obligations of the company, but they can incur a loss or profit based on the financial success of the company. Depending on the rights issued through the share class, shareholders have the right to vote on corporate matters. They do not tend to be involved in the day-to-day operations of a corporation.
Shareholder rights and responsibilities are set out in a Shareholder Agreement.
Directors
Directors (or Board of Directors) are elected by shareholders to oversee the corporation’s activities and affairs. They are appointed to protect shareholders’ interests and supervise the company’s managers and its day-to-day operations.
Directors must:
- Provide consent to be on the board
- Be at least 18 years old
- Be an individual and not a corporation
- Not have bankrupt status
- Not have been found incapable in Canada or elsewhere
- Not hold a term for longer than 4 years
A minimum number of directors on the Board must be Canadian residents. Corporations must have at least one director.
Officers
Officers manage the daily operations of the corporation. They are appointed by and report to the directors. An officer can also be a director. The officers’ powers and responsibilities are set out in the corporate bylaws.
The traditional officer titles and their duties are:
- President: the head of the officers who is responsible for carrying out the company’s mission and vision.
- Vice-President: second in command and assists the President with implementation of company strategies, as well as other various duties.
- Treasurer: manages all financial aspects of a corporation, including reporting, budgets, sales, funding, bookkeeping, banking, and more.
- Secretary: tends to corporate administration, including taking minutes at meetings, complying with government requirements, and recordkeeping.
Corporations must have at least a president, secretary, and treasurer.
Larger corporations may have a Chief Executive Officer (CEO), who is the head of officers and implements board decisions, Chief Operations Officer (COO), and Chief Financial Officer (CFO). They both report to the CEO.
Corporate Meetings
Incorporators’ or Directors’ Organizational Meeting
Once incorporated, the incorporator will receive a Certificate of Incorporation and should hold a meeting to complete the remainder of the company’s formation.
During the first meeting, the initial directors may:
- Elect officers
- Adopt corporate bylaws to govern rules and responsibilities within the corporation
- Specify the fiscal year
- Issue share certificates for initial shareholders
- Appoint an auditor or accountant in the meantime until the first Shareholder Meeting
- Set up a corporate bank account or banking arrangements
- Adopt a record keeping system (organizational minutes and minute books) and corporate seal
Shareholders’ Organizational Meetings
Corporations are required to hold an annual Shareholder Meeting (also called Annual General Meeting) within 15 months of forming a corporation. This meeting may repeat several actions from the Directors’ Meeting, but its purpose is to approve all the proposed organizational requirements, such as:
- Electing directors/officers or confirming those appointed in the Articles
- Appointing an auditor/accountant
- Confirming corporate bylaws
- Ratifying resolutions proposed at the Directors’ Meeting
- Creating a shareholder agreement to determine how issues will be handled, including the transfer of shares, the actions taken upon death of shareholder, and more.
In the event a shareholder is not able to make it to the meeting, they may appoint a shareholder's representative to vote on their behalf.
In smaller corporations where there is only a small number of directors, it may be preferable to use a Shareholders' Resolution or Directors' Resolution to document resolutions or decisions in place of a meeting.
Corporate Record Keeping
A corporation is expected to keep organized records as part of its corporate obligations. This responsibility means not only organizing your incorporation records in a minute book, but also maintaining proper minutes and voting resolutions from meetings, including where, when, and who attended each meeting.
Here is a checklist of documents you will want to keep together in a minute book:
- Articles of Incorporation
- Corporate Bylaws
- Directors’ and Shareholders’ Resolutions
- Shareholder Agreement
- Certificate of Incorporation
- Copies of Filings (Initial and Annual Returns)
- Provincial Permits and Registrations
- Officer/Director Consents
- Proxies or Shareholder Representative Documents
- Share Certificates, debt obligations, membership records
- Corporate Guarantees
- Notices of changes to address, name, or directors
- Business Number and registration
Other important documentation your corporation should keep organized (doesn’t need to be stored in minute book):
- Employee documents
- Commercial Lease or Purchase Agreement
- Financial statements, banking, loan, and investor information
- Business Plan
- NUANS or corporate name search reports
- Documentation relating to trademarks
- Patents