Hey guys! In this post, we will dive into your questions about "should my corporation have directors."
I am a lawyer and have been doing this for more than ten years. I have had the privilege of working with various corporate actors, and that definitely includes dealing with corporate directors.
Last year, when we first got locked down, I was of course a bit shocked. As time goes on, I started thinking about how I can give something back to our community. One idea was to create this blog as a source of credible, reliable information. In particular, I hope that this first set of blog posts is helpful for guys (and girls) who may be first-time entrepreneurs.
The answer to today's question -- should my corporation have directors -- is both straightforward and deceptively complicated. Let's start with the simple answer: Yes, any corporation absolutely must have directors. There are no exceptions to this one!
And, what about the more complicated answer? Well, I am going to dig into that below.
Its all good, man. Let's do this.
What Role Do Corporate Directors Play?
Incorporation is a powerful legal structure. It has both legal advantages -- think limited liability -- and potential business advantages, such as the opportunity to build an enduring brand.
As a first-time entrepreneur, you might have questions about the role that directors play within the corporate structure.
Yes, in some cases, a single person wears multiple hats, i.e., as shareholder, director, and chief executive officer.
But, in all cases, a corporate director has specific functions and obligations under the law.
If you are thinking about incorporating, you should understand these details. I am going to cover three points below
- The corporation brings together multiple actors with distinct roles.
- The directors are metaphorically akin to the corporate vehicle's driver.
- Without directors, a corporation is not properly incorporated.
Point 1: Multiple Actors
We have already talked about how the corporation enjoys a separate legal identity. This separate legal identity can be helpfully described as a structure, or you might like to call it a frame.
The corporate frame needs to be filled by persons, i.e, actors. Inside the frame there will be at least three types of actors: the shareholder(s), the director(s), and the officer(s).
Sometimes the actor can be either a natural person (a human being) or a legal person (such as a corporation). But, some roles can only be acted out by an actual human being.
Both the directors and the officers must be natural persons, i.e., real human beings.
Shareholders are entitled to vote on decisions that go to control of the corporation. However, they (the shareholders) are not necessarily entitled to decide the corporation's strategy. This role falls to the directors. Likewise, everyday business decisions are the responsibilities of corporate officers, such as the chief executive officer.
Point 2: Directors are the Corporate Driver
A director of a corporation is responsible for the overall performance of a corporation's business and must make strategic decisions. Concretely, directors have signing authority to make these decisions on behalf of the corporation. This allows the directors to make decisions on behalf of the corporation in a legally valid form.
More practically, the directors oversee management to ensure that the business strategy is properly executed. The directors are, therefore, the agents of the shareholders. (Future posts will discuss the principal-agent problem.)
Metaphorically, you can say that if the corporation is a vehicle, then the directors are the driver.
Or, the directors are like an airline pilot. The pilot, sitting in the cockpit, is operating at the 30,000 feet level. He oversees what is happening, takes in the big picture, and has the responsibility to change course when necessary.
Point 3: A Properly Incorporated Corporation Needs Directors
Now Air Canada does not let you or me fly the plane when we buy a ticket. In the same way, even if the corporation has shareholders, it still needs at least one pilot, i.e. a director.
The process of incorporation has two steps.
In the first step, the incorporator files for and receives the Articles of Incorporation. The incorporator may be either the founder shareholder of the corporation or an agent thereof.
At this point, it would be a mistake to think that the corporation is constituted properly. There is still a second step that needs to be completed, and this second step requires at least one corporate director.
During this second step, the corporation appoints the director(s). The second step also involves approving shareholders' and directors' resolutions that organize the new corporation's affairs. These resolutions serve to confirm the central tenets of the corporation's governance as required by law. Furthermore, in an Ontario corporation, certain paperwork must be returned to the Ministry within sixty days.
Still Looking for More Details?
The above was an attempt to simplify what is a complicated and at times confusing question.
A few related issues definitely come up and you may have questions about: principal-agent problem within the corporation; directors' common law duties and statutory duties; corporate maintenance; and etcetera. Ill be adding more posts over the coming months.
That is all, Folks
Thanks for reading today's post. I hope it helped clear up any questions about why your corporation definitely needs at least one director.