6 Practical Tips on Good Governance for New Private Corporations in Ontario
Starting a new business is exciting, but when that business becomes a corporation, you also take on legal obligations that extend far beyond naming a director and managing daily operations. Even if you are the sole director and shareholder, you still owe legal duties under the Ontario Business Corporations Act (OBCA) if incorporated provincially, or the Canada Business Corporations Act (CBCA) if incorporated federally.
Whether you’re launching a startup, incorporating a professional practice or restructuring a family business, sound corporate governance is crucial to the long-term success of your corporation. Good governance is essential for avoiding disputes, enhancing transparency, preventing delays in business transactions and protecting your company from audits and fines.
Here are six practical governance tips every new private Ontario corporation should know.
1. Maintain proper corporate records
A minute book is not just a suggested folder to hold your corporate records, it is a key component to managing a corporation and a legal requirement. Section 140 of the OBCA requires Ontario corporations to prepare and maintain a minute book and corporate records, including:
- Articles of incorporation and bylaws;
- Shareholder and director resolutions and meeting minutes;
- Registers of directors, officers, shareholders and individuals with significant control;
- Accounting records, such as financial statements and annual returns.
Failing to keep these up to date can cause serious consequences, such as triggering an audit and fines by the Canada Revenue Agency (“CRA”) or the inability to receive loans or open up a bank account for your corporation. Furthermore, it can create extensive delays and higher legal and accounting fees in any potential sale or transfer of your business or its assets in the future if you need to update years’ worth of filings and records to produce to a potential purchaser.
Ask your lawyer to keep a digital and physical minute book for easy access and compliance.
2. Hold (and record) annual meetings
Even in closely held companies, corporations are legally required to hold an annual shareholders’ meeting, otherwise referred to as an annual general meeting (“AGM”), or pass a resolution in lieu within 18 months of incorporation, and subsequently within six months of their fiscal year-end or no later than 15 months following the previous AGM.
- Prior to the AGM, directors should pass resolutions for the following:
- Approve the previous year’s financial statements;
- Appoint officers, where applicable;
- Declare/approve dividends; and
- Address any other corporate matters.
The AGM must include resolutions from the shareholders to:
- Elect directors for the upcoming year;
- Approve financial statements;
- Approve the report of an auditor, if required, or pass a unanimous resolution consenting to the exemption of an auditor for that year; and
- Any information regarding the financial position of the corporation required by the articles, bylaws or any unanimous shareholders agreement.
Regardless of whether your corporation is an active business or more passively used to engage in commercial activities, these resolutions are required, whether achieved through meetings or written consent. Not doing so can call the corporation’s legitimacy into question, especially in disputes or audits, or cause disruptions in future transactions.
These tedious, yet important, resolutions can be routinely drafted and filed on an annual basis to satisfy these requirements and avoid the risks of non-compliance. It is advisable to schedule your annual corporate resolutions each fiscal year with your lawyer.
3. File annual returns and notice of changes
Private corporations incorporated under the OBCA must file the following:
- Initial Return with the Ministry of Public and Business Service Delivery (“The Ministry”) within 60 days of incorporation;
- Annual returns with the Ministry within six months of their fiscal year-end; and
- A Notice of Change with the Ministry within 15 days of any updates or changes to the board of directors, officers or other information provided to the ministry, such as registered address or email address.
These filings can be made through your Ontario Business Registry account, or with the assistance of your lawyer or accountant.
4. Put a shareholders’ agreement in place
Many people go into business in good faith with friends or family members when relationships are on good terms, without thought to how the relationship may change as different issues arise.
A shareholders’ agreement outlines how major decisions will be made, what happens if someone wants to leave, how shares can be sold or transferred and how disputes will be resolved. Without one, you’re left with the default rules in the OBCA or CBCA, which often don’t reflect your actual intentions and can lead to lengthy and costly litigation.
Key issues to cover include:
- Buy-sell provisions;
- Voting rights and decision-making thresholds;
- Exit planning and succession; and
- Restrictions on share transfers.
Many new corporations skip this step until it’s too late. If your corporation has more than one shareholder, it is always best to deal with these issues as soon as possible rather than waiting until things potentially sour down the road.
5. Create clear employment and contractor agreements
Startups often hire fast and informally. But unclear or missing contracts with employees, contractors or co-founders can lead to disputes over:
- Ownership of IP or work products;
- Termination rights;
- Compensation and equity; and
- Confidentiality and non-compete clauses.
Always document roles, responsibilities and ownership. If it matters, put it in writing.
6. Get professional advice early
Startups often avoid legal advice to save money, but the cost of fixing a governance or shareholder mistake later is much higher. A small investment upfront in structuring and setting up shares, authorizing resolutions and bylaws can save thousands in legal fees and business disruptions.
Work with a business lawyer and CPA who understand your industry, goals and risk profile.
Conclusion
Good governance is not red tape; it’s the foundation of a trustworthy, resilient and scalable company. The earlier you embed these practices into your corporation, the easier it will be to manage growth, raise capital and prevent internal conflict.
If you’re looking for assistance in starting or maintaining a corporation, or would like more governance advice uniquely tailored to your business, feel free to contact me at mtassone@rossmcbride.com or reach out to the professionals at Ross & McBride LLP. We’re here to help.
This article was originally published by The Hamilton Spectator.
