To Be Or Not To Be: The Pros and Cons To Being A Director

You may be asking yourself whether or not you should be a director of the corporation with which you are involved.

While you may not see a downside to having more authority within the corporation, remember that, as Stan Lee wrote, “With great power comes great responsibility.”

Here we explore some things to keep in mind when you are making that decision.

Contrary to the limited liability enjoyed by shareholders, directors do not have limited liability.

Directors are appointed by the shareholders to look after the corporation’s affairs on their behalf.  Therefore, in effect, a director is similar to a trustee; directors have a responsibility to the shareholders to conduct the affairs of the corporation in such a way so as to protect the interest of the shareholders.

Directors should be directly involved in and part of the day to day operation of the business, so that they have control over their own liability.

This is because a director could be found to be personally liable for:

  1. Any fraud, theft or other defalcation;
  2. The paying of dividends, redeeming of shares, or giving financial assistance from the corporation to any shareholder, director or associate where this is likely to make the company unable to pay its debts as they become due;
  3. Up to six months’ unpaid wages for employees of the company;
  4. Unpaid taxes, (including penalty and interest), where the corporation has failed to deduct and pay employee remittances and withholding taxes;
  5. Any deficiency between the fair market value of any property that was paid for the purchase of shares of the corporation and the value of the shares issued;
  6. The extent to which you, an associate, or any relative, benefits from confidential information which has not been disclosed to other shareholders;
  7. Where a director fails to act on behalf of a corporation honestly, and in good faith with a view to the best interests of the company;
  8. Where a director fails to act with the care, diligence and skill of a reasonably prudent person in comparable circumstances;
  9. Unremitted G.S.T.

In this regard, a director may be liable to virtually anyone who has an interest in the corporation.  This would include not only fellow shareholders, but also the creditors of the corporation, its employees, Revenue Canada, and even the corporation itself.

If a director is an “absentee director” and isn’t watching over how the corporation is conducting itself, there could be great personal ramifications.

Additionally, in some cases, where someone isn’t actually a director, he or she could still be deemed to be a de facto director depending on their level of involvement with the company and the level at which they are a “directing mind” of the company.  The greater your involvement, the greater the chance of you being found to be a de facto director when it comes to whether or not you have personal liability.

Finally, remember that all situations are different, and depend on the particular facts in question.  If you have any questions about the above, or any other corporate matter, contact us to have a discussion about your particular situation.

This content is provided for general information purposes only and does not constitute legal advice nor does it constitute an opinion of any kind.*

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