What are Shareholders, Board Members, and Officers

You’ve incorporated your business with Ownr, picked a name and protected it. You’re almost set up! So close! The next step for a compliant business is filling three important roles or categories of roles: shareholders, directors (otherwise known as board members), and officers. 

In order to be legally compliant as an incorporated business, you need to fill these roles. As a small business you might wonder if this requirement applies to you – especially if you’re a one-person business or have a small team. So, how do you fill them? Don’t worry, you don’t have to go write job postings on Linkedin just yet. These are roles that can be filled by several people, or even just one person occupying all three simultaneously. 

Though you always need at least one shareholder, officer and director, the addition of a new team member can come at different stages. Let’s say, you’ve been running your business on your own for quite some time, fulfilling all the above roles yourself. You may find this is no longer sustainable – your business has grown and it’s time to hire a Chief Financial Officer (CFO). You can appoint this individual as officer of the company under the title chief financial officer. 

But how do you go about doing that and where do they fit into your business structure? Before we get into the nitty gritty, you need to know just what the three roles are, what they do, and why they matter.

What are shareholders?

Put simply, shareholders are the owners of your company. Each shareholder owns a piece of the company, and the unit of ownership is called a share. Legally, shareholders sit separately from the company itself. Unless they’ve signed a personal guarantee, shareholders are generally not liable for debts of the company. But they do serve an important role within it. 

It might seem paradoxical at first, but in the hierarchy of a company, shareholders sit at the top. They appoint directors, and the directors appoint officers. All of those are important roles, which we’ll explore more below. 

Individuals with significant control

Before we do, there’s another category to be aware of: individuals with significant control. These individuals may or may not be shareholders, but they must be recorded and disclosed. 

As of 2019, the Canadian government has new regulations requiring corporations to record and disclose who actually controls the company. Normally these are the shareholders, directors, and officers, but they could also be individuals of significant control. They could have a significant number of shares, or they could be non-shareholders who’ve entered into an agreement to help run or manage the company in some way. Either way, you’ll need to keep them in your records to stay compliant, and Ownr can help. 

Types of shareholders

While all shareholders are owners of a company, there are different types of shareholders. How many shares you own may determine how much control you have of the company.

 Minority shareholder

Minority shareholders own less than 50 per cent of a company’s shares. They generally have less control than a majority stakeholder and don’t have the power to make major decisions (at least not alone), but they do have important rights and roles. The main one is the right to vote at shareholder meetings, which gives each shareholder a voice in the company’s direction in a democratic way. 

 Majority shareholders

Majority shareholders are individuals or entities who own more than 50 per cent of a company’s shares, which can give them a controlling interest in that company. They have more significant influence than minority shareholders and thus more power to make major decisions. They can affect your company’s operations in a more direct way, including electing board members.

 Employee shareholders 

By becoming employee shareholders, a company’s employees can also be owners. 

Employees can choose to buy stock in a company, or the company can offer shares in the company as an incentive or benefit, or as part of their compensation package. That’s often known as an employee stock option plan. A company may allocate a certain percentage of shares to an employee option pool, that gives workers the right to purchase company stock at a discounted price or as part of their compensation. 

Buying shares can give employees a voice by voting on important company decisions and let them glean valuable intel at annual meetings (more on that shortly). Needless to say, it also instills a sense of ownership. The work they do ultimately contributes to the profit that they can share. 

How to determine ownership percentage of a company

The ownership percentage of a company is determined by how much stock you own compared to how much stock is available. In other words, it’s the number of shares owned, divided by the total number of total shares. For instance, if you own 51 shares of a company that has 100 shares, you would own 51 per cent of the company and you would be a majority stakeholder. Keep in mind, this is not a fixed number, as the percentage could change based on how many shares are available. 

At some point, you may own less than half of all shares and are still the majority stakeholder.  For example, you can own 20 per cent of the company but have five other shareholders who each own 16 per cent. In this case, you would still be the majority shareholder.

Although this scenario isn’t likely if you’ve just launched your business, you may want to give up equity (or ownership) in your business as your company grows. Whether you are raising capital and giving a piece of ownership as a return, or simply bringing on other individuals with the skills to expand the company, you may find yourself with a smaller ownership percentage.

Shareholder Rights

Being a shareholder comes with certain rights that depend on what kind of ownership you have as there are different “classes” of shares. 

Voting and Non-Voting Rights

Shares may be categorized into classes. Most shares carry voting rights, which lets shareholders vote on matters that affect the company. 

However, a company could also issue non-voting shares. These shares carry the right to receive dividends or share in profits, as well as the right to sell their shares, but not necessarily the right to vote. Typically non-voting shares are given to shareholders with preferred stock in the company.To raise capital, a company can offer non-voting shares for shareholders to earn profit without any control over decisions on issues, such as governance.

By forgoing their right to vote, non-voting shareholders may get increased priority to dividends or preferred status in the event of liquidation. Sometimes employee stock options fall into the non-voting category.  

The name “non-voting” can be slightly misleading however, as the Canada Business Corporations Act (CBCA) still gives non-voting shareholders the right to attend certain meetings and vote on certain fundamental issues. These are generally special cases that affect the status or value of non-voting shares and are, therefore, not likely to affect most non-voting shareholders. 

Key shareholder rights

In Canada, shareholders have a number of rights. They must be notified and invited to attend shareholders’ meetings. They can also vote at the shareholders’ meetings (unless their shares don’t have voting rights). They can approve bylaws and other major changes and elect and dismiss directors. They are entitled to review the company’s basic information (known as Company Information Rights), such as its articles of incorporation or its minute book.

Shareholders are not automatically entitled to become employees of the company and earn a salary, but they are entitled to receive a share of the company’s profits, which are also known as dividends. Shareholders also have liability, but are not usually liable for a company’s debts. Instead, they have “limited liability” – a responsibility for company debts up to the value of their own shares.

What happens at the annual shareholder meeting?

Annual shareholder meetings are an important element of operations for incorporated or public companies. This is where shareholders – legal owners of the company – can use their voice and power. To be compliant, you will need to hold these annual meetings, notify all shareholders, and give them a chance to attend. 

Generally, this is when shareholders hear about the company’s financial performance, operations, and any major issues. Shareholders can ask questions to the board of directors or management team in a more direct way than they might be able to otherwise. 

Most importantly, they can vote to elect board members or to affect the operations or direction of the company. Generally, the number of shares you own will dictate how many votes you get. Shareholders who can’t attend the annual meeting (which might be in person or remote), may send a proxy – a person empowered to go in their place – to represent them and vote on their behalf.

Even If you’re a small company with one or two shareholders, you’ll still need to have this meeting. Alternatively, a written resolution signed unanimously by all shareholders. This document is called a shareholder resolution. You can find this in your company’s Minute Book on your Ownr dashboard.  

How do I add or remove a shareholder from my company? 

The most common way to become a shareholder (or to no longer be one) is to buy or sell shares. A shareholder is no longer a shareholder when they own zero shares in a company. However, the company can also add and remove shareholders. 

To do so, they need to either issue new shares, which can be done with Ownr, or transfer (aka: sell) existing shares to someone else. The first share issuance usually happens immediately after the company is incorporated, by issuing shares to the very first shareholders, but a company can continue to create and issue shares throughout its lifetime. This is referred to as issuing shares “from treasury.” That means they’re created by the company rather than transferred from one shareholder to another. 

As a shareholder, you can also sell your shares to another shareholder or to the treasury – as in, sell them back to the company. 

Share properties

Not all shares are necessarily created equal. A company can choose to build multiple share classes with various properties. Luckily for you, Ownr lets you build complex share classes that suit your company’s needs. Different share classes give shareholders different rights and responsibilities. Standard shares are called “common” but more complex classes may be called preferred or special. 

What is a share register? 

A share register is a record of all the shareholders in a company. It includes the names and contact information of all the shareholders, what class of shares they own and how many, who can receive dividends and vote at shareholder meetings. To stay compliant, it is important to keep these records. 

A cap table, or capitalization table, lists anyone with an ownership interest – including shareholders, investors and option holders. It lists all issued shares, owners, and investment agreements. It also includes the price of each share and total price of all shares. You can access or export your cap table on Ownr. 

What are board members or directors? 

Collectively, directors of a corporation are known as the board of directors. Directors, or board members, are appointed and approved by the shareholders of the company. Directors are often referred to as the ‘directing mind’ of the corporation. 

A shareholder agreement, which is formed when a company incorporates, is a contract between owners. The shareholders enter into this agreement, which determines the decision-making powers of the directors (among other things). By default in Canada, a company’s directors are given extensive powers and decision-making influence, but the shareholder agreement could transfer those powers to the shareholders. You can create this agreement on Ownr, and transfer powers – such as the ability to change officers, by-laws, the nature of the company’s business, partnerships and mergers – to your shareholders. 

In the agreement, shareholders determine how directors are appointed to the board. Commonly, they’re elected by a majority vote of shareholders, but it’s also possible for voting shareholders to each appoint a director. Shareholders can also be directors, so they often appoint themselves. 

To be compliant, changes to the board of directors must be approved via shareholders or director legal resolutions. Typically, making changes and making corporate resolutions require the services of a lawyer which can be costly. But with Ownr, you can add and remove directors and make unlimited changes or resolutions with the Managed Corporation plan. This can be a big cost-saver, especially when you factor in legal fees. 

Duties of board members

The duties of the board members are determined by the shareholders and usually codified into the shareholder agreement. Officially, board members are elected or appointed to represent the interests of the shareholders. They offer high-level direction and strategy for the company. They set policies and advise the executive team, using their positions to act in the interest of the company. 

A board member signs resolutions approving appointment of officers and new shareholders. Their duties are also financial: submitting an annual return, which reports and acknowledges financial statements, sets out the annual director meeting and the annual auditor appointment. 

Liabilities of board members

Directors are responsible for much of the high-level decision-making of the company, but they are also personally liable for a few important things. Those include legal issues like fraud, taxes and remittances owed to the government, and unpaid employee wages. 

Types of board committees

Once the board of directors is established, the directors may form small groups, called board committees, in order to carry out specific tasks or responsibilities. These committees can vary depending on what has to be done and the specific needs of the company, but there are some common structures. 

The most common is the standing committee. This group looks at the “big picture” issues, finds solutions, and provides directives to the company. This committee tends to be permanent and meets regularly. 

When the board has specific challenges or issues to address, they will often form an ad hoc committee, also known as a task force. These committees are temporary, as they often dissolve once a specific task is complete. 

Advisory committees are formed to consult and provide an outside perspective, and so they’re often made up of former board members. An executive committee, meanwhile, manages the operations of the board of directors. The structure will vary, but will often have a president, vice-president and secretary.

Of course, if you’re a small business or just starting out, these committees may not be necessary as each member will have their hands in most responsibilities. However, it could come in handy as your company grows and tasks need to be delegated. 

 How to establish a board committee

When you incorporate with Ownr, you will file your articles of incorporation with the government. This is where you establish your company’s bylaws, which also establish how you will create your board of directors and form board committees. 

Typically, committees are established by the board through a resolution which will define  the purpose of the committee, along with its composition, how long it will exist, and its scope. The board of directors might appoint the members of the committee, or it could be put to a vote. 

What are officers?

Once the board is in place, they will then appoint officers. Officers oversee day-to-day operations of the company and actively manage the business, which is to say they’re vital to the operation of the business. They have a duty-of-care to ensure your company is managed properly. 

Officer positions can vary, but every company will have a president. Other roles like CEO, CFO, vice-president, treasurer, and secretary often exist too, though they can all be held by the same person. Ownr enables you to add, remove or change your officers at any time. These documents are added to the company’s Minute Book to show that the appointment has been made lawfully. 

These roles may also be designated as signing officers, which means they’re authorized by the corporation to sign legal contracts and agreements on behalf of the company. This authority is often specified by the company’s bylaws and may be baked into specific officer positions, such as secretary or treasurer. 

Liabilities of corporate officers

Technically, a corporation is a separate legal entity that is distinct from its owners which can protect them from liability. Essentially, the company assumes its own liability, which can protect officers in the event of a bankruptcy or lawsuit. 

However, corporate officers can be held liable for fraud – either fraud they engage in or that they’re aware of, such as insider trading. They can also be held liable for violations of laws governing a company or negligence that can cause harm to the shareholders. 

Corporate officers also have fiduciary duty, which means they have a duty to act in good faith and in the best interests of the company and its shareholders. They can be held liable if they are in fiduciary violation, such as if they put themselves in conflicts of interest or act in their personal interest rather than that of the corporation. Misusing company assets for personal gain, as well, would be a big legal “no-no”. 

Frequently asked questions about shareholders, board members, and officers

What is the difference between board members and officers?

Board members and officers have distinct, but interrelated, roles in a corporation’s structure. 

The board of directors is elected by the shareholders to represent their interests. They are the governing body of a company and make high-level decisions, like setting corporate policy and overseeing management. 

Corporate officers are elected or appointed by the board of directors and manage the day-to-day operations of a company. Officers have titles like president, vice-president, and CEO. They are responsible for carrying out the strategy and policies of the board. 

What is a shareholder officer?

A shareholder officer is in a unique position. They are both a shareholder and an officer. They are elected or appointed by the board of directors, but they also act in their own interests and responsibilities as a shareholder in the company. 

What are officers on a board?

Officers are people who hold specific roles on the board of directors. Their duties are determined by a company’s bylaws and they are elected or appointed by the board itself. They serve as the point of contact between the board and managers and make sure the board’s decisions are carried out. They often are responsible for holding board meetings and other administrative communications. 

 What is the difference between a shareholder and director? 

A shareholder is technically an owner of the company. Each shareholder owns a share of the company’s stake, which then gives a financial stake in the company and the right to vote on matters affecting the company. They also share in the company’s profits. A director is a member of the board, elected by the shareholders to make decisions in their best interest. They are distinct, but interrelated. 

 How do I make a compliant share transfer or issuance? 

Share structure can be changed throughout a company’s existence by transferring shares (essentially buying and selling), issuing more shares, or vesting shares to earn them over time. To stay compliant, each typically requires resolutions approved by shareholders (often through bylaws made at the outset of incorporation) and by the board of directors. You can do all three with Ownr, and keep records of how many shares there are and how much they are worth, which can save you high legal fees. 

Next steps: How to make a resolution

Now that you’re incorporated and given yourself a role, you’re officially a separate legal entity from your business. Someday, you may move to a bigger office to accommodate your growing business. That means your business address will change and need to be recorded in your company’s minute book. 

Resolutions are how changes such as these are logged and approved. But that’s just one of the things resolutions do.

Corporate resolutions may seem complicated, but learning how to use them can be an important step in your growing business.