In Ontario, the key cornerstone of corporate law is the Ontario Business Corporations Act (also referred to as the “OBCA”). This comprehensive statute governs the incorporation, operation, and governance of businesses operating as corporations within the province. Given the highly competitive business space in the province, corporations cannot afford to ignore legal compliance. Thus, whether you are a seasoned entrepreneur or just starting your corporate journey, understanding the key provisions of the OBCA is crucial.
This blog post serves as a guide to this important piece of legislation and outlines important aspects of the Business Corporations Act that Ontario businesses should know.
Understanding the Scope of the Ontario Business Corporations Act
Ontario’s Business Corporations Act applies to a vast range of corporations operating in the province, including:
- Profit-making corporations: These are the most common types of corporations established to generate profit for shareholders.
- Not-for-profit corporations: These corporations focus on charitable or social goals and operate by reinvesting any surplus funds into their overall mission.
- Professional corporations: These types of corporations are restricted to specific professions, such as medicine and law, as these corporations are also subject to additional requirements beyond the OBCA, which are set by the applicable governing body.
Key Concepts in the Ontario Business Corporations Act
The Ontario Business Corporations Act is a complex piece of legislation that sets out the legal requirements that Ontario corporations must abide by. Some key concepts are discussed in further detail below.
Incorporation
When considering a business structure, incorporation is an attractive option for many entrepreneurs as this establishes the corporation as a separate legal entity from its directors and shareholders. Most small businesses operating in Ontario will incorporate provincially. Corporations benefit from limited liability, where the corporation itself is responsible for its debts and obligations, while shareholders’ personal assets are generally protected. In other words, the corporation is distinct from the individuals involved in the corporation for legal and financial purposes.
The OBCA sets out the requirements for incorporation in Ontario, which include, but are not limited to:
- Having a business name that meets the requirements under the legislation;
- Establishing a board of directors;
- Preparing articles of incorporation;
- Creating corporate bylaws;
- Issuing shares and preparing a shareholder agreement; and
- Obtaining necessary licenses and permits, if applicable.
Shares, Shareholders and Shareholder Agreements
Shares represent an ownership interest in a corporation and are considered property, similar to a house or vehicle. Any “person” (whether a human individual or a legal entity such as a trust or corporation) can hold shares in a corporation. Share capital is raised through the issuance of shares, a person who owns shares (a shareholder) has certain rights, such as the right to receive dividends and voting rights at annual and special meetings. The OBCA allows for the creation of different classes of shares, which may impact voting rights and dividend entitlements.
While the OBCA lays the groundwork for corporate governance, shareholder agreements can act as a powerful supplement in Ontario business law. Shareholder agreements are drafted between shareholders and they establish additional terms beyond the requirements set out in the OBCA. Shareholder agreements can be drafted to proactively address a variety of issues, such as share transfer restrictions, voting rights beyond standard share classes, and dispute resolution mechanisms. Well-drafted and enforceable agreements can foster transparency and create clear expectations among shareholders, in turn promoting strong internal governance while minimizing the risk of future conflicts within the corporation.
Directors and Officers
The OBCA outlines the principles for managing corporate affairs and details the responsibilities of directors and officers. Every corporation must have a board of directors who will be responsible for the overall management and leadership of the corporation and for making decisions regarding such activities. Directors are elected by the shareholders and obtain shareholder approval before making certain decisions, such as changing bylaws or amending the articles. Officers (such as the President, CEO, and CFO) are responsible for handling the day-to-day operations of the corporations and are appointed by the directors.
Together, both officers and directors form the corporation’s management. In some small businesses, one individual may act as the sole director, sole officer and sole shareholder.
Corporate Bylaws
Corporate bylaws are internal rules that govern the operation of the corporation. Corporations can craft their own internal rulebook within the framework established by the OBCA. These rules outline specific procedures and expectations regarding different aspects of corporate governance and can cover matters such as shareholder voting rights, conduct of officers and directors, and board meetings. Well-drafted corporate bylaws can create an efficient and effective governance structure that aligns with the corporation’s unique goals.
Annual Returns and Ongoing Compliance
Corporations must maintain proper and detailed business records and complete annual filings with the government per the OBCA. These corporate records contain information pertaining to the corporation’s shareholders, board of directors, as well as minutes of meetings and resolutions. Private corporations are also required to maintain a record of persons with significant control of the corporation, in order to promote transparency and accountability.
Important Takeaways Regarding Ontario’s Business Corporations Act
Navigating Ontario’s Business Corporations Act is crucial for the efficient and lawful operation of your provincial corporation. As such, it is crucial to ensure that you adhere to the specific legal requirements outlined in the legislation beyond the initial inception of your corporation. In order to ensure that your corporation satisfies the necessary legislative requirements both at inception and on an ongoing basis, it is important to consult with an experienced business lawyer who can provide support on a variety of matters, including incorporation, negotiating contracts, drafting bylaws and shareholder agreements, obtaining financing, assisting with commercial real estate matters, and preparing for the future through business succession planning.
Contact the Corporate Lawyers at Tierney Stauffer LLP for Trusted Guidance on a Variety of Business Matters
The knowledgeable business law lawyers at Tierney Stauffer LLP work closely with clients to understand their personal and professional goals. Whether you are buying or selling a business, incorporating a business, or seeking to establish a not-for-profit corporation, our business law team can help. We are committed to providing each client with practical and tailored advice regardless of the size of the business. To schedule a consultation with a member of our business law team, contact us online or by phone at 1-888-799-8057.
