• Organization – The Basics

    For many people, organizing the corporation is probably close to the most boring thing they can do without actually having to count all of the sand on a beach. Dull – perhaps, but in many cases quite necessary. It often comes as a surprise to people that when they incorporate a business in Ontario, there is more to do on initial setup than mere incorporation. But incorporation only provides you with the corporate entity – until it is ‘organized’, it has only (essentially) ‘acting’ director(s), and no shareholders, officers, by-laws, and so on. It’s governed by the applicable corporate law (in Ontario, the Business Corporations Act), but many specifics of how corporations work are left out of the applicable corporate statute, and are for the corporation to decide.

    If the corporation is to have only one shareholder, the person who incorporates it – the incorporator – sometimes skips organization – the incorporator generally controls the corporation anyway (because they typically establish themselves as the first director, and that person has the power to issue shares, which in general grounds the power to do everything else). Some people defer organization because they see it as something they can do later, when they need it done for some specific purpose. This delay is often of little or no significance for many – in the short term, whether or not a corporation is organized will generally be of no importance to customers, many suppliers and other third parties, so it is sometimes ignored, at least at the outset.

    But certainly for the corporation that has more than one shareholder, organization can be critical – it establishes important details of key legal relationships between the shareholders, basics without which the potential for costly misunderstandings can increase. And banks will generally require some organizational steps be taken when you open an account. As a result, in many cases it makes sense to get it done when you create the corporation.

    Organization is generally very easy – in simple cases there are a few corporate resolutions to prepare, shares to be issued, a by-law or two to adopt, and director(s) and officer(s) to elect and appoint. There are common forms for much of this, and most lawyers have clerical staff handle it, at a small cost to the client.

    The most complex aspect of organization arises when the corporation needs a shareholders agreement – the form of agreement used when the shareholders want to go beyond the basics of the applicable corporate law and the by-laws in their establishment of the rules that are to govern how the corporation manages its affairs, and how its shareholders are to relate to each other and the corporation. In the near future, I’ll post on shareholders agreements in Ontario, and what purposes they serve.

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