*Please note that School of Scheff is not legal advice and should not be taken as such. School of Scheff provides legal information which is specific to the Province of Alberta. Should you reside outside the Province of Alberta, please contact a lawyer in your jurisdiction with any legal queries as the laws across the Canadian provinces vary widely.*
The Small Business Ecosystem
An incorporated company in Alberta has three main roles when it comes to the business structure. Each is distinct and therefore, it’s important that their differences are understood. Director, shareholder, and officer are terms you’ve likely heard if you are a business owner. Small or large, each company has them. It can be confusing what each of these roles mean and what their functions are.
If you think of a company like a living, breathing person (which in law, aside from the living and breathing part, they are a legal person and are treated as such) you can imagine each of these roles in relation to the body:
- Company = Body
- Directors = Brain
- Officers = Hands
- Shareholders = Food/Nutrients
- Energy = Money
The Directors are the Brain of the Body (Company) and decide who the Hands (Officers) are. The Hands (Officers) take direction from and are controlled by the Brain (Directors). The Body (Company) requires Energy (Money) to operate and the Food/Nutrients (Shareholders), which give the Body Energy (Company Money), dictate who controls the Body (Company) by deciding who forms the Brain (Directors).
While simplistic, it’s a great orienting analogy. There can be different people in each of these roles, or the same people in each of these roles. Often in small businesses, the same individuals occupy these roles, but as businesses grow, these individuals may end up being different people.
The directors have many responsibilities as it relates to the company. They have a number of duties in law such as a duty of loyalty (acting impartially and placing the interests of the corporation first, not allowing their decisions to be tainted by self-interest or self-dealing); and a duty of care (exercising the care, diligence and skill that that reasonably prudent person would exercise in the circumstances).
They also have a duty in law to the shareholders, who elect them and who invest funds into the company for it to operate. Directors have various ways in which they can incur liability at law, including but not limited to employee wages (they can be held liable for up to 6 months of wages); financial liability (usually debt or borrowing related liabilities); or illegal activities.
Often being an incorporated company insulates director’s personal assets; however, this protection can be taken away in limited circumstances. This happens most often in cases of fraud and in those cases, the Courts can “lift the corporate veil” and place liability directly onto the directors personally.
To be a director of a company in the Province of Alberta, you must be an individual who is at least 18 years of age; of sound mind; not bankrupt; not a represented adult as described in the Adult Guardianship and Trusteeship Act; and not a “formal patient” as described in the Mental Health Act.
The day to day for a director of a company, if they are not also officers, can vary widely. For a large company, a director may form part of a Board of Directors of which there can be many directors who make decisions together. There can also be a single director. Some directors may be directors of many companies at once.
If the director is also an officer of the company, they are most often employed by the company as well and hold titles such as President, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer etc. but not always. There are no prescribed titles but the most common are President, Vice President, and Secretary or the various C-Suite titles.
Shareholders are the owners of the company. They are the individuals who have “skin in the game”. They have invested funds into the company and own shares. There can be a single shareholder or many shareholders. Each year at the annual general meeting (which is sometimes conducted by written resolution only) the shareholders elect the directors, appoint the auditor (or waive the requirement), and approve the financial statements for the previous fiscal year.
Shareholders may also be directors or officers of the company, but in some cases, they are investors only. Shareholders have the authority to remove directors and can do so for a variety of reasons, sometimes it is because the directors are not creating enough value for the shareholders, or they are not leading the company in the direction the shareholders would like to see it go.
As mentioned above, officers are generally employees of the company and are most often members of the executive team, management team, partnership etc. They are leaders and high level decision makers. Most often, the board of directors will select a CEO to operate the company and from there, the Board of Directors will leave the operations of the company to the CEO. This includes any of the day to day operational decisions. The Board of Directors will also most often be in charge of setting the strategic direction for the company and expect that the CEO carries out that direction.
Directors, shareholders, and officers all work together to ensure that a company runs smoothly. While there can be many complexities and intricacies, these are the basics of each of these roles.