Shareholders and ‘the one man corporation’
There are three types of people involved with a corporation: directors, officers, and shareholders. Each of these groups has its own responsibilities and powers within the corporation. Yesterday, we talked about directors and officers. Today we are going to be talking about shareholders and small one person corporations.
Shareholders
A person becomes a shareholder when shares in the corporation are issued to them in exchange for money paid, property transferred, or past services rendered to the corporation. Shares can also be acquired by purchasing them from another person who already owns them. Corporations must keep a record of their current shareholders and of any share transfers that take place.
Shares can be divided into separate classes, each of which can have their own characteristics. Where a corporation has only one class of shares, all shares must be equal and include the rights to vote at all shareholder meetings and to receive the remaining property of the corporation upon dissolution. If the corporation has multiple classes of shares, these two rights can be divided amongst the various share classes. Other characteristics that can attach to a class of shares include the ability to receive dividends and restrictions on the transfer of the shares.
Shareholders have certain rights, powers, and duties within the corporation. Because the shareholders are the “owners” of a corporation while the directors typically only manage or supervise the management of the corporation, one of the most important rights the shareholders of a corporation have is the right to elect and remove directors from office. A corporation is required to hold annual shareholder meetings, at which the shareholders have the right to receive the corporation’s financial statements and to appoint an auditor if they so choose. This allows the shareholders to monitor the financial status of the corporation.
Shareholders have the right to approve certain fundamental changes affecting a corporation through a “special resolution.” A special resolution is one that is passed at a meeting of shareholders by a majority of not less than two-thirds of the votes cast. Certain fundamental changes to the corporation must be approved by special resolution. Proposed fundamental changes that affect certain classes of shares specifically must be approved by a two-thirds majority of that class of shares, even if that class is ordinarily non-voting. Fundamental changes include things like amendments to the articles of incorporation, an amalgamation, a continuance, and the sale, lease, or exchange of all or substantially all of the property of the corporation.
Because they are the owners of the corporation, shareholders have remedies that protect their interests. If there is a fundamental change in the corporation that the shareholder disagrees with, they may have the right of dissent and appraisal, or in other words, the right to force the corporation to buy their shares.
The one-person corporation
While there are three classes of participants in a corporation (directors, officers and shareholders), it is not uncommon for a single individual to want to incorporate a business. Fortunately, Canadian corporate law allows a single person to perform all three functions. Because of this, it is possible to have a fully functioning corporation being run by only one person.
In a one-person corporation, the individual will be fulfilling three distinct roles. There are actually many professional consultants that operate this way, because of the tax advantages and to realize the low corporate tax rates. In this situation, the individual must be careful to ensure that they are carrying out the responsibilities that attach to each of the roles they are performing. For instance, any fundamental changes to the company must still be authorized by the individual in their capacity as a director and then approved by a resolution passed in their capacity as a shareholder.
October is small business month and to celebrate, writers from Aluvion Law will be making daily posts on one of the most common forms of Small Businesses: Corporations! Corporations are particularly popular among the high-tech and IT crowd because of the tax advantages they provide to rapidly growing companies, as well as the assistance they can provide in unlocking capital. The other great benefit recognized by the ‘serial entrepreneurs’ that flock to the IT sector is that they limit the liability of the owners in the event of the business failing.