Shareholders Vs Directors In Corporations | Edmonton Accountant
Is the limited personal liability offered by corporations. Absolute key is not absolute.
Yeah, I can see why. Cause it’s mad.
Hi. Welcome to another edition of ask Squirrel CPA. Today we’re talking about shareholders versus directors in corporations. So Trevor, is this one of the things that they, you know, you’re, you’re a journeyman electrician. They teach you about shareholders and directors and electrical school. Absolutely not. They don’t teach you those things in electrical school, all the teachers, all the things that you need to become a good electrician. And I think today is a very, very good topic that a lot of people who are in trade school want it, have their own business afterwards and most started out as sole proprietors. So I think, uh, we need to get some better understanding on these topics we’re talking about today. For sure. Yeah. And they quote that, we’ll go back to, it’s the, the, the old Michael Gerber quote offer of our favorite e myth. The fatal assumption is if you understand the technical work of a business that you understand the business that does that technical work.
And the statistics is, you know, that 50% of all Canadian small businesses, uh, will fail. And the second biggest reason that they’re going to fail, they’re going to run out of cash. And that can be very important if you’re a shareholder or director. Edmonton Accountant, to understand the consequences that go with that in the story that we have or you know, business owners, you know, they’re getting other people involved in the corporation and you know, family members, friends and the people, they’re often overly fearful of becoming a shareholder of a corporation, but they’re probably not fearful enough of becoming a director. Is, is usually what it is. Uh, so Trevor, one of the questions do you think the business owner should be asking? So who owns the corporation? The shareholder or directors? So the shareholders, they are the owners of the corporation. So not the directors, but the shareholders.
These are actually the owners of the corporation and the different share classes. And we’ll show, you know how much in the number of shares we’ll show, you know, what percentage of the company that they own. Okay. So who elects the directors? So the shareholders are the ones that elect the directors. So whoever owns the company gets the site. Who? The director of the company. Yes. All right. So now are the re the directors then responsible for the ongoing business of the corporation? That’s right. So then the shareholders, you know, they own the company, they elected the directors, but then the directors are really responsible for the ongoing business of the corporation. They’re the ones that are effectively making the decisions. Although the shareholders are the ones that elected him in the first place. Can, can you get them out if they don’t want them there anymore?
Uh, in most small businesses is, is the how that’s gonna work. Edmonton Accountant, but it’s important to know, Cheryl, there’s all, and on the corporation, the shareholders then elected and the directors are the ones who are responsible for the decision making thereafter. Okay. So do corporations offer personal protection from lawsuits? Yes. So the corporation is one of the big benefits of being incorporated, what we call limited liability. And it reduces the risk of any lawsuit being brought against you personally. So, although the corporation can you get sued, just like anyone can get sued in any, any facet of business, the chances are is that they’re going to have to sue the corporation and not the people behind the corporation. Okay. So is the limited personal liability offered by corporations? Absolute is not absolute. And that can be one of the, you know, a false sense of security.
I’m incorporated. There’s nothing that can ever happen to me. Uh, so all, although it dramatically reduces the risk of anyone being sued personally for their, you know, personal house, personal savings or car, any other personal assets, it’s not absolute, it’s not 100% that they’re not going to be able to pierce the corporate veil and go after the individuals behind it. Okay. So if individuals are sued Libby against the shareholders or the directors, it’s nine times out of 10 going to be against the, it’s going to be against the directors. So the, the whole point of being a shareholder of a corporation is you have the risks, you have the, the ability to participate in the profit and loss of the corporation. You know, the, the, if the corporation does well, you do well, but if the corporation loses, you know, the whole purpose of being a Cheryl does, you can’t lose more than what you invested.
And that’s the whole principle of being a shareholder. That’s why when you invest in public companies on the stock market, you’re worried about losing your money, but you’re not worried about losing more than your money. You can only lose that investment. You spent $100 to buy shares in Telus. If telus Susan goes bankrupt, Edmonton Accountant, you know, you won’t get your hundred dollars back. Um, but you know, you can’t be held responsible for more than a hundred dollars. This is the same thing virtually in a, in a private corporation is you know, your shareholder ownership, you know, that does not subject you to personal liability. Edmonton Accountant, but being a director, although you know, having a corporation itself and then it’s first the liability and the director, that’s what use you, opens the window. What can shareholders often be asked to sign personal guarantees? Uh, shareholders can be asked to sign personal guarantees and that will, you know, open the door for some personal liability for them.
Uh, so one was how often people are, you know, they’re a little bit nervous about becoming a shareholder of a corporation. Becoming a shareholder is, is usually a pretty low risk proposition as long as you haven’t signed in your personal guarantees. You know, if you’ve guaranteed the $300,000 loan as a shareholder, that’s a whole different story. You’ve just guaranteed it. But just being the shareholder, Edmonton Accountant, you know, pretty low risk. Being a director, it’s a little bit more risk. But operating, uh, as an unincorporated company, it’s usually the highest level of risk, right? So if there are no personal guarantees, should share ownership, be scary generally that on its own should not be scary. So you know, if you want to own one share of a company for a, for tax purposes to do a little bit of a split income urgent to participate in the, uh, you know, the, the profits of the company in a tax efficient manner, that itself shouldn’t be your barrier because it’s generally not going to open you up to that much of a, of a liability either way.
Okay. So is it always wise for both spouses to be directors? Not always. So the directors is, you know, that’s what generally opens you up to liability. You know, you’ve got a big, uh, Edmonton Accountant, uh, construction bond and they’re insisting that the director’s beyond the hook. Uh, uh, if there’s a second thing that directors, you know, as soon as all of that liability. So really what happens is by being a, the director, now you’re assuming some liability. So if all the shares are owned in one household, why do we want 100% of the household assets on the line when we can, you know, limit to 50% of the house? I’ll assets being on the line. Um, so it’s not always a good idea to have both spouses as directors. And I’m sure there’s a lot of, there could be some, Edmonton Accountant, matrimonial a family lawyers out there screaming at me for, for this sort of thing.
Um, and they’re probably right that it probably creates some barriers to protecting that person’s interest, but also you have to worry about, you know, is this corporation you’re going to get sued and are they going to go after the director? So it’s something that, you know, you should be discussing with a lawyer and winging against. But you know, we’ve all often gone down the road with clients and after discussions with their lawyers, Edmonton Accountant, you know, we resolved to have only one of the spouses to be the director, this corporation. Okay. So our directors personally liable for unpaid taxes. There’s the big one, and this is the one that can go sideways in a hurry. It can be the unpaid taxes. Cra can come after the directors personally. Edmonton Accountant, you know, it doesn’t really have to be active of gross negligence that all they can just come after the direct just for taxes.
And a lot of people will think, well, if it’s taxes, the business made money, so what’s the point of the money should be there. But often it’s the payroll taxes they get behind on GST, they get behind on payroll and now they have both spouses on the hook and the payroll taxes can be hundreds of thousands of dollars. Especially if we’re talking like a, a general contracting business and it goes side, a project goes sideways in a hurry. Edmonton Accountant, and those unpaid liabilities and now they’ve become personal liability when one of the reasons why you incorporate it in the first place was to avoid that personal liability. Uh, so it’s a big consideration that a lot of business owners should taken, taken to consideration the weight being a shareholder, not a big deal unless you signed a personal guarantee. But being a director can be a challenge. Right. So thanks so much for joining us again today. As always, please leave your comments in the section below so we can use it too. You know, so we can use it to, for guidance on what to do in future videos, and please add the light. Come subscribe button so you deliver you tips on how to beat the odds of business. Thanks very much.