Personal Liability on Incorporation

I own and operate a small business and a friend suggested that I set up a corporation in order to protect myself from liabilities. If I incorporate, will I be free of all personal liabilities associated with this business?

Answer:

If your company wants to borrow money from a bank, you will quickly learn that the bank will insist on having your personal guarantee for the debt.  You might find that major material or inventory suppliers or landlords will also require your personal guarantee as a condition of establishing an account or lease with them. 

A second type of personal liability that cannot be avoided with a corporation is the liability which arises from specific provisions of provincial and federal law.  For example, if the corporation fails to withhold the proper deductions from its employees' salaries and remit them to Revenue Canada, then the directors may be personally liable for that amount.  There are many examples of this in the law and they usually relate to monetary deductions.  However, there are other examples. For example, under the Environmental Protection Act of Ontario, a director of a company could have personal liability for environmental damage caused by the corporation.

We are also seeing cases, especially in small companies, where the directors are being named as defendants in lawsuits.  This is a developing area of the law, but it is becoming clear that if a director, especially one who is a significant shareholder of a corporation, directly and intentionally causes the corporation to act in a way which causes damage to someone, then the law will not permit that person to hide behind the corporation in order to protect themselves from personal liability.

The large advantage is that your ordinary trade creditors, who have not likely obtained personal guarantees from you, will not be able to sue you personally if your business fails. 

In summary, you can lose your protection from liability by contracting out of it, as in the case of giving a personal guarantee, or as the result of statutory provisions, or as the result of directly causing the corporation to act in a way which causes damage to others.