Three core groups of people are involved in every for-profit corporation: shareholders, directors, and officers.
If you’ve heard these terms thrown around and have yet to be sure exactly what they mean, don’t worry! You are not alone.
This article aims to explain the basics of each of these three roles.
How do people become shareholders, directors, or officers?
In brief: Shareholders buy an ownership stake in the corporation (i.e. they subscribe for and purchase shares in the corporation). Shareholders elect the directors, and directors appoint the officers.
This is how it happens in practice when a corporation is first incorporated:
It starts with the people who are incorporating the new company. Those people are referred to as the “incorporators”. Those incorporators automatically become the first directors of the corporation (usually*).
(*I say “usually” because it can vary a little bit from jurisdiction to jurisdiction and also because another corporation can be an incorporator but cannot act as a director. And also because sometimes an additional director who is not an incorporator is named in the incorporation documents.)
Once the corporation is formed, the directors call a meeting to organize the corporation (which, for the vast majority of companies, happens on paper instead of an actual live meeting). At the directors’ meeting, they appoint the officers and offer shares for sale and/or accept subscriptions for shares (which results in the creation of shareholders).
The shareholders also hold an organizing meeting, elect (or re-elect) directors, and deal with other basic business. Again, this usually happens on paper, with everything happening on the same date (usually the date of incorporation).
After the corporation is formed and organized, the roles will change from time to time. This happens when shareholders sell and buy shares, directors resign or are elected, and officers resign or are appointed.
(Still unclear? An analogy may help. You can think of corporations as robots.
What are the roles of Shareholders?
Shareholders have it the best. They hold an ownership stake in the corporation. They have no personal liability in that role**; the only thing at risk for them is the money that they have put in to purchase the shares.
(**unless there is fraud or some other abuse of the corporate structure).
Shareholders have very few responsibilities and a lot of rights. One of their most important rights is to see the corporation’s annual financial statements and, with some limitations, demand that the financial statements be audited.
The main role of shareholders is to appoint directors and to vote on critical events in the life of the corporation. (In practice, they also play a very important role in holding directors, and in turn, the corporation, accountable.)
What are the roles of Directors?
In short, directors are treated as the “guiding mind” of the company.
Why is that? It is because directors act as the corporation’s head or brain. It is the directors that are ultimately responsible for the corporation.
Directors make most of the big decisions in the corporation’s life (some of which they need to put to the shareholders to vote on). For example, it is directors who decide whether and when dividends should be paid out to shareholders. It is also directors who work with the accountants of the corporation to arrive at financial statements that are in a good enough state to be approved by the directors (as opposed to shareholders who just review the financial statements, directors actually have to review and sign off on the financial statements).
What are the roles of Officers?
The officers of a corporation are responsible for the business’s day-to-day operations.
Officers are appointed by the directors to execute the strategy and decisions that the directors implement. Officers usually work closely with the board of directors but also have a hands-on role, doing the actual work of the business on the ground. Officers are also the ones that are most often the public face of the company.
Directors also heavily rely on officers to ensure that the business complies with legal and regulatory requirements while simultaneously meeting the financial and other objectives of the business. Officers are often called on to convey information to directors so that the directors have more visibility into the workings of the corporation and its current status.
Officers are given titles. Typical titles are President, Secretary, Chief Executive Officer, Vice President, Chief Financial Officer, Treasurer, etc.
Who can be a shareholder, director, or officer?
In many smaller corporations, there are just a few people involved, sometimes just one, and those people almost always fill more than one role. For example, suppose there is just one person involved in a corporation. In that case, that person will be the sole shareholder, the sole director, and the sole officer… and that is actually very common.
Shareholders can be just about anybody… including non-humans. That means that corporations, partnerships, and other “legal bodies” can be shareholders.
On the other hand, directors need to be real live human beings. And not just any human being. Directors need to be 18 years of age or older, of sound mind, not bankrupt and might need to meet some other requirements (for example, in relation to citizenship).
Officers also need to be real live human beings. However, they do not need to meet the same criteria that apply to directors.
Are there any risks to being a shareholder, director, or officer?
The risks of being a shareholder are very, very low. Barring an extreme event, your risk is just what you paid for the purchase of your shares (but if shareholders are called on to finance the company in other ways, for example, with unsecured debt or personal guarantees, the risks can increase substantially).
The risks of being a director are much higher. Both directors and officers take on personal liability by holding such roles. The top three sources of personal liability are unpaid taxes by the corporation, unpaid wages owing by the corporation, and environmental offences of the corporation. So, for example, if the corporation ceases operations suddenly and cannot pay severances to its long-time employees, then the employees can recover the wages owing from the directors personally (up to a certain threshold).
Another risk of being a director and officer is that a company bankruptcy could impact your ability to act as a director or officer in another company in the future or even your ability to borrow money personally.
Because of the steep risks associated with being a director and officer, companies often put in place Director and Officer Liability insurance (which is referred to as D&O coverage) and provide Indemnity Agreements to their directors and officers.
What’s best, being a director, officer, or shareholder!?
It depends!
It is tempting to see one role as better than the other, but in some ways, it is most important that the role fits the individual’s strengths. People who excel at on-the-ground, hands-on work would see an officer role as the best. At the same time, people who excel at strategy and governance might do best in a director role. And those who are exceptional at assessing risks and allocating capital would be best as shareholders.
All things being equal, in our society, being a shareholder is usually the best role because the potential rewards far outweigh the potential risks. The ideal scenario for a director or officer is also to have a stake as a shareholder.
In reality, what role people fall into usually depends on their financial means, age, and experience. Typically directors will be older people who have already had a long career and who have gained good insights, experience, and networks along the way. Officers will typically be younger and mid to late in their careers. And shareholders can vary, but for companies with outside investors, typically, those investors are older and more financially established.
How do I know who the shareholders, directors, and officers are?
This is where the company’s records come into play. The corporation is required by law to keep detailed records about its directors, officers, and shareholders. That information is supposed to be held in the corporation’s minute book.
Some information is filed with the corporate registry and with CRA, but not all, meaning that the Minute Book is the central source of truth about each corporation.
We hope this article gives you a better understanding of directors, officers, and shareholders. Contact us today if you have any questions.
The Tobuso platform is designed to help small companies easily keep detailed records about their directors, officers, and shareholders. It acts as a Minute Book in the cloud for your corporation. Sign up today!
