Basic Corporate Governance for Private Companies
With basic corporate governance for private companies there are many benefits to incorporating such as the small business deduction and limited liability. Often a business is run as a proprietorship but other times several parties are involved and the business operates as a partnership and in this regard the corporate structure provides a great deal of flexibility.
My primary role as a business lawyer is to help provide structure to the entrepreneur’s or business person’s vision. In some case this is straight forward and in other cases it is more complex if multiple parties are involved and performing multiple roles.
At the most basic level it is advisable for a company to have a minute book. The minute acts as a repository that contains all the basic corporate agreements such as the certificate of incorporation, notice of articles, articles, and generally be required to open up a bank account. Every company must have a registered and records office with a third party such as a law firm. The registered and records office acts as a “buffer” between the company and outside world – so if there is any time sensitive communication regarding the corporation it will be delivered to the registered and records office as opposed to some other location where it may not be retrieved on a timely basis. In addition, all important agreements should be stored in a minute book and all transactions pertaining to the company should be documented – e.g. payment of dividends, bonuses, etc. In the absence of such documentation the Canada Revenue Agency is likely to treat all payments as income. The other key aspect is to keep proper financial records and not commingle assets of the company with individual assets.
Companies can be formed under provincial law or federal law – this is an area of overlapping jurisdiction under the constitution. Now that BC provincial law has been updated there are few differences and the main benefit of the federal company is name protection all across Canada – as opposed to just the province of incorporation.
Each company (whether federal or provincial) is required to hold an annual general meeting of shareholders. The first such meeting is within 15 – 18 months of the anniversary date of incorporation. Keep in mind that the date of incorporation is generally just an arbitrary date – and bears no relation to the financial year end which may be the calendar year end or typically a quarter. At the annual general meeting the shareholders elect directors, receive an update from management, and either appoint or waive an auditor and appoint an accountant and receive the financial statements. Each company is required to file an annual report with the applicable companies branch and with the companies branch of any other province in which the company is doing business. If this is not done on a timely basis the company can be struck off. Very often current filing becomes an issue when the company is applying to a bank for a loan and the bank will check to see if the corporate filings are current or not. Over time the date of the annual meeting gets in synch with the financial year so there is not a long hiatus between the last financial year end of the company and the date of the meeting. Bottom line – shareholders elect/appoint directors.
Directors in turn are charged with the task of acting in the best interests of the company – which I would say – broadly speaking means ensuring that the management is following a workable business plan. The Toronto Stock Exchange, for example, has established board guidelines – to ensure that a company has a board that is following a workable process. Keep in mind that Toronto Stock Exchange companies are quite large – unlike many private companies.
The board of directors in turn appoint officers – e.g. Chief Executive Office, Chief Financial Officer, etc. In my experience the most important task for directors is to ensure that the company has a written plan so all parties involved have a common understanding of what the company’s key short term and long term objectives are. Secondly, it is important for people to realize the importance and function of having a board. It has been recognized over the years that for evaluative purposes collective decisions are often much better than individual decisions. So it is important for the board to function as a board. With a private company the issue can be further confused because often people are wearing several “hats” – they may be a shareholder, a director, and also performing a function for the company (e.g. CEO, manager of sales, etc.). It is important to delineate and not confuse these roles – and again – as a lawyer I can help draw up separate agreements to set out the boundaries of roles for each person. At a high level I like to use the concept of working “on” the business as being a board function as opposed t working “in” the business.
Accordingly, a board should have set meetings (e.g. quarterly), make sure there is someone in attendance who can take notes (who is not also participating in the meeting – as it is hard to do both at once) and have an agenda for meetings and prepare, circulate and review the minutes for accuracy. While these things may seem trite – it is not different than trying to embark upon any other activity like a diet or fitness program. You need to have a way to measure where you are at. Often people fall into the “crisis” mode – I would like to have meetings, etc. but we don’t have time . . . .
Again, circling back to my role as counsel for a company, what I can do is advise people of the basic legal requirements and some gentle guidelines of what to do – in order to meet the basic legal requirements and then establish a framework that encourages accountability and minimizes potential conflict and misunderstandings.
— Kim Johnson