Benefit of Incorporation: LIMITED LIABILITY

Contact Neufeld Legal PC for your incorporation legal work at 403-400-4092 or Chris@NeufeldLegal.com

The legal principle of limited liability means that a corporation is a separate legal entity from its shareholders, with this legal separation providing the shareholders with a virtual legal shield that protects the shareholders' personal assets from the debts and liabilities of the corporation.

The Core Principle of Limited Liability of a Corporation

• Separate Legal Entity: A corporation is a distinct "person" in the eyes of the law. It can enter into contracts, own property, borrow money, and sue or be sued in its own name.

• Shareholder Protection: Because the corporation is a separate entity, the shareholders are not personally responsible for its debts. If the corporation fails or is sued, a shareholder's financial loss is generally limited to the amount they have invested in the company (i.e., the value of their shares). Their personal assets, such as their home, car, or personal savings, are typically protected.

• Distinction from other Business Structures: This is a key difference between a corporation and other business structures like a sole proprietorship or a general partnership. In a sole proprietorship, the owner and the business are legally the same, and the owner has unlimited personal liability for all business debts. In a general partnership, partners are also personally liable for the debts of the partnership.

Limitations and Exceptions to Limited Liability

While limited liability offers significant protection, it is not absolute. There are several situations where a shareholder or director can be held personally liable for the corporation's debts.

• Personal Guarantees: A very common exception. For small, private corporations, banks and other creditors often require shareholders or directors to sign a personal guarantee to secure a loan or a line of credit. If the corporation defaults on the debt, the individual who signed the guarantee is personally on the hook for the repayment.

• Statutory Liability for Directors: Directors of a corporation can be held personally liable for certain corporate debts under specific statutes. This includes:

  • Unpaid employee wages: Directors can be personally liable for up to six months of unpaid wages.

  • Unremitted source deductions: Directors can be held personally responsible for the corporation's failure to remit taxes, such as employee income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums, to the Canada Revenue Agency (CRA).

  • Other specific liabilities under various acts, such as environmental laws or health and safety regulations.

• "Piercing the Corporate Veil": This is a rare legal action where a court disregards the limited liability protection of a corporation and holds the shareholders personally liable. This usually occurs in cases of fraud, misconduct, or a blatant disregard for corporate formalities. The court must find that the corporation was not a true separate entity but merely a "mere façade" or "alter ego" of the individual. Examples of actions that could lead to this include commingling personal and corporate funds, or using the corporation to commit a wrongful act.

• Misconduct and Negligence: Limited liability does not protect an individual from liability for their own personal misconduct or negligence. For example, a director or officer who commits a fraudulent act, or an engineer working for a corporation who is negligent in their work, can still be sued personally for their actions, even if they were acting on behalf of the company.

In summary, limited liability for corporations iis a powerful tool for separating business risk from personal finances, which encourages investment and entrepreneurship. However, it is not an impenetrable shield and can be circumvented by personal guarantees, statutory liabilities for directors, and, in rare cases, a court order "piercing the corporate veil."

For businesses seeking the potential benefits associated with incorporation, which can be financially significant if properly integrated into one's commercial enterprise, contact our law firm to engage the professional services of an experienced incorporation lawyer. Contact our law firm to schedule a confidential consultation at 403-400-4092 or via email at Chris@NeufeldLegal.com.

* Please note that the flat rates associated with a standard incorporation are strictly limited to a basic incorporation (provincial or federal) and does not involve other matters that might be corrollary to the incorporation process or might be atypical for a standard incorporation, including but not limited to related legal or tax advice, engagement with other governmental bodies or professional bodies, licensing, drafting of pertinent business contracts (i.e., shareholders' agreements), negotiations, disputes, financing, coordination with other companies or other legal structuring.

Limited Liability: The legal principle of limited liability means that a corporation is a separate legal entity from its shareholders, with this legal separation providing the shareholders with a virtual legal shield that protects the shareholders' personal assets from the debts and liabilities of the corporation. Read more.

 

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