Hey guys! In this post, we will dive into your questions about "who is the founder of a corporation."
I am a lawyer and have been doing this for more than ten years. I have had the privilege of working with a range of corporations, and that definitely includes dealing with corporate founders.
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.
This question -- i.e., who is the founder of a corporation -- is an interesting one. There is space for unnecessary confusion. Let me try to clear things up.
It's all good, man.
What You Will Learn Today
Incorporation is a powerful legal structure. It has both legal advantages -- think limited liability -- and business advantages, such as the opportunity to build a brand.
As a first-time entrepreneur, you might have questions about how all of this works. There are many potential questions, and 'who is the founder of a corporation' is worth thinking about in detail.
The identity of the founder is a bit confusing. Why? I think that this potential confusion boils down to two sets of overlapping terminology.
We need to distinguish between the process of incorporating the corporation and the shareholders of the corporation.
I am going to dive into three key details in this post. I hope it clears things up.
Details 1: The Birth of the Corporation
You already know that the corporation is a separate legal entity. That sounds simple enough at first, but when you stop to think about it you might have questions about how exactly this separate legal entity comes into existence.
Metaphorically speaking: how does the corporation go from being a glimmer in someone's eye to being a legal entity with rights and responsibilities?
In Canada, it makes sense to think of the corporation's birth as divided in to two steps.
In the first step, an application is made to a government Ministry. For example, in Ontario, a Form 1 is submitted to the Ministry of Government and Consumer Services. Provided that the contents of the Form 1 are not obviously out of order, the Ministry will issue a preliminary approval.
At this step, the Ministry processes the content of the Form 1 into a new document. The new document is known as the corporation's Articles of Incorporation.
In the second step, the corporation drafts initial shareholders' and directors' resolutions. These initial resolutions organize the corporation. They determine the corporation's key actors by electing directors, appointing officers, and issuing shares to shareholders. To use another metaphor: the corporate egg is being fertilized.
In practice, Step 1 and Step 2 are connected. In fact, there is an unspoken assumption that the performance of Step 2 will immediately follow the performance of Step 1.
(Put slightly differently, if only Step 1 is performed but Step 2 is ignored, then the corporation is in the world but is metaphorically living its life as a baby. A corporation that stays in this baby stage is, to be a bit crude, not going to be very useful. There is also a real possibility that sooner or later the government will forcibly dissolve the baby corporation.)
What does all of this mean for the identity of the founder? It means that, depending on the facts, there could be at least two founders. There is the founder from Step 1 who filed the Form 1. This person is also known as the incorporator.
There is also the founder from Step 2, i.e., the founding shareholder or shareholders who first invested in the corporation's shares. Now, in some cases, the person who initiates Step 1 could be the corporation's founding shareholder, but this is not necessarily so in all cases.
I am going to go through some points about the Step 1 founder and the Step 2 founder below.
Feature 2: Who Can Act as the Incorporator?
The incorporator may be one of the initial investors in the corporation, but that is not always the case. The incorporator can also be a person acting in an agency capacity, i.e., as a service provider.
An incorporator may be, subject to certain limitations, either a natural person or a legal person such as another corporation. The legal criteria for who can act as the incorporator of a Canadian corporation are relatively liberal. In practice, it is common for service providers such as lawyers and specialized agencies to act as the incorporator.
Whether or not you describe the incorporator as the corporate founder is really a matter of personal preference. As far as the law is concerned, the incorporator is the person who has brought the corporation into existence. But, it is also correct that this type of incorporator is distinct from a founding shareholder.
Feature 3: Founding Shareholder
Just like there are rules about who can act as incorporator, there are also rules about whether an individual can act as both incorporator and founding shareholder. The following reviews a couple examples.
For instance, under Step 2 a corporation will need to elect directors, appoint officers, and issue shares. In some cases, the same person will serve in all three roles.
But, this is only possible if the founding shareholder is a natural person.
Why? Because the directors and officers of a corporation must be natural persons. So, in the case that the incorporator and founding shareholder are a legal person, i.e. another corporation, then that corporation must have access to at least one natural person to serve as director and officer of the new corporation.
Furthermore, an incorporator who intends to be the sole officer and director of the corporation as well as the founding shareholder should be a resident Canadian. Again, the reason for this statement is that the law sets out certain requirements for the number of non-resident directors and officers.
Bottom line
The question of, i.e., who is the founder of a corporation, is an interesting one. Depending on the terminology that you choose to prioritize, there are two types of founders.
On the one hand, the operator is practically responsible for bringing the corporation into existence. On the other hand, there is the founding shareholder. Sometimes the incorporator and the founding shareholder are the same person, but not always.