If not, do you know the risks?
Congratulations! You have incorporated a corporation! You searched the name to make sure no one else had it, you selected the name, you determined the share structure and then you filed the Articles of Incorporation. It feels so good to be done with the paperwork!
Wait! Are you sure you are done? Not so fast…
Recently, I have come across several small successful businesses run by both savvy entrepreneurs or professionals. One thing they all had in common? They did not know about their legal requirement to prepare directors’ and shareholders’ resolutions (organizing or annually), what it meant to organize their corporations, or what a Minute Book was. Some of them did not know what a resolution was.
This article is for you if you are asking:
- What is the risk to my business if I don’t follow these requirements?
- How does it benefit my business if I do them?
- What do these terms mean: directors’ resolutions, shareholders’ resolutions, organizing a corporation, and Minute Books?
- How do I eliminate these risks to my business?
1. Let’s start with the risk: What is the risk to your business if you don’t organize your corporation, prepare the required annual resolutions or have a Minute Book?
Failure to do so can have many negative implications for a business such as:
- Failure to meet ongoing legal obligations under either the Ontario Business Corporations Act or the Canada Business Corporations Act (collectively the “Acts”). Under the Acts, the corporation is required to have one shareholders’ meeting and one directors’ meeting in a twelve-month period. Certain decisions taken by the corporation must have shareholders’ approval; some special decisions must have super majority approval to be valid. Properly-written resolutions can help you meet these legal requirements.
- Canada Review Agency (CRA) audits/ penalties. For example, if your corporation is paying a shareholder money as a dividend instead of salary, and there is no paperwork to support this, you could have an issue with the CRA and the shareholder may have to pay more in taxes (dividends are taxed at a different rate than salaries and/wages) and/or face penalties.
- Turning away potential buyers of companies. When potential buyers (or their lawyers or accountants) do due diligence on your business, one thing they will ask to see is the Minute Book. An incomplete or non-existent Minute Book could be a red flag to them that corporate governance is not taken seriously in your corporation. The corporation will also spend a lot more money in legal fees to have the Minute Book brought up to date on a “RUSH” basis.
- Not being able to meet the corporation’s obligations to its shareholders. Under the Acts, each shareholder has the right to see (parts of) the Minute Book. All the shareholders’ resolutions and many other corporate records must be kept in the Minute Book and be available for inspection by shareholders. Generally speaking, directors’ resolutions are also kept in the Minute Book, but they are not made available for shareholder inspection.
- Challenges from other shareholders of past or current decisions. Sticking with the example of dividends, what if you had put in a lot of work in your corporation and the other shareholder(s) and director(s) agreed to give you a bigger dividend than the other shareholders. Then, 1-2 years later, a disgruntled shareholder asks to see the Minute Book and says that there was no resolution granting you the dividend. Could they accuse of you having improperly taken the money from the corporation?
2. How does it benefit my business if I do them?
In brief, you will:
- Meet your legal requirements to have these documents in place and up to date.
- Reduce or eliminate potential issues with CRA for failure to have these.
- Demonstrate good corporate governance to your stakeholders (ie, banks, potential investors or buyers, etc).
- Build discipline into how you make and record business decisions. This is good business practice that is also good for business.
3. What are these: directors’ resolutions, shareholders’ resolutions, organization of a corporation, and Minute Books?
Resolutions: Directors’ Resolutions and Shareholders’ Resolutions
Resolutions are, in essence, formal written documents that are required to document the corporation’s important decisions. They are signed (and dated) by a majority (or more) of either the shareholders or directors of a corporation, depending on the topic.
Organizing a Corporation
Once you incorporate your business under the applicable Act, it needs to be organized within a certain amount of time.
Organizing means setting up the initial and key business frameworks and decisions, such as:
- approving the company by-laws
- the shareholders electing the directors, and directors’ consents
- the directors appointing the officers
- the shareholders appointing the auditors (or waiving this) and appointing the accountants
- determining who has authority to do the company’s banking
- setting the company’s year-end
- issuing shares
- determining how many directors there will be
- and so forth.
Every year after the initial organizing resolutions are done, the corporation’s directors and shareholders must issue annual resolutions. The annual resolutions cover topics such as:
- approval of financial statements
- appointment of auditors (or waiver) and appointment of accountants
- election of directors (by shareholders) and appointment of officers (by directors), and each director’s consent to act as a director (directors have liability for the acts of the corporation)
- any transfer of new issue of shares
- changes to the items in the organizational resolutions
- special resolutions (where required by law)
While a Minute Book is not a specific requirement, it is something that most (if not all) corporations have.
A Minute Book is a book (basically a special binder) that holds all of the resolutions mentioned above, as well as list of shares and when they were issued (share register), a list of when directors were elected and/or resigned and officers were appointed and/or resigned, (director register and officer register), the bylaws, etc.
Many corporations leave the Minute Book with their lawyer or accountant, many of whom now store the Minute Book in a cloud-based services.
As noted above, shareholders of a corporation are entitled to see many of the above-noted documents, but not the directors’ resolutions. In a future blog, we will talk about when the shareholders and the directors are the same people, as is often the case in small, closely-held corporations.
4. How do I eliminate this risk?
If your corporate records, organizing or your annual resolutions are missing or are deficient, you will need to update your records. How can you do this? Where there are deficiencies it is best to speak to a lawyer that practices corporate law.
In some simple cases it may be possible to do one overall resolution to rectify the deficiencies; for example, if the corporation never issued any dividends or where the company has always had the same directors and officers.
Where corporate matters are more complex, such as related to issuing shares following the initial offering, redeeming or cancelling shares, or issuing dividends, the resolutions for those transactions will be more complex and will most likely need to be done on a year by year basis. Other measures may also be required.
The best way to protect your business is by understanding and protecting yourself from business risks.
Let us know if we can help you.
Today’s blog was co-authored with Colleen Peffers of Peffers Law (http://pefferslaw.ca/)
Amee Sandhu has been a business lawyer in Ontario for 20 years. She created Lex Integra Professional Corporation in 2019 and focuses exclusively on business law and corporate ethics.
In her current practice Amee advises clients on commercial, corporate, integrity, anti-corruption, ethics and compliance, and supply chain risks.
Understand your risks. Perform with Integrity.
The purpose and contents of this blog is to provide information only, and it does not constitute legal advice. Reading this blog does not create a solicitor-client relationship between the reader and Amee Sandhu or Lex Integra. It is recommended to engage (hire) a lawyer if you require or are interested in legal advice.
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