Limited Liability and Your Business
Posted on March 2nd, 2011 by Centennial Law in Corporations
Do you have a business? Is it incorporated? Should it be?
The concept of incorporating a company to limit liability to business creditors originated in the not so distant past of the nineteenth century. For lawyers, it’s a very basic idea. For many people, however, it’s a concept which is difficult to grasp.
First of all, what is a company? A lawyer might tell you that it’s an artificial person, an entity which has the status of a person – without, of course, being one. Companies can only be created where specific laws permit. In British Columbia, we create companies under the Business Corporations Act (the provincial law) or the Canada Business Corporations Act (the federal law).
Imagine that John Doe wants to start a business – but he’s afraid to do so because he knows that it will be risky. How can he limit his risk? By incorporating a company and using the company as the vehicle through which to carry on business. John Doe might then become the only shareholder of John Doe Inc. – but, in the eyes of the law, John Doe and John Doe Inc. are two separate persons.
Now, imagine that John Doe was right to be worried and his business fails. Does John Doe have to pay the debts of John Doe Inc.? The answer, subject to a few exceptions, is no. What are the exceptions? The recent case of Kobes Nurseries Inc. v Darren Convery, 2010 ONSC6499, provides one example. In that case, Mr. Convery incorporated the business which he was already carrying on as a nursery and garden centre. Unfortunately for him, he forgot to tell the people he was already doing business with, including Kobes Nurseries Inc., that he had incorporated. The result? When Kobes Nurseries Inc. sued him personally, they won.
Incorporation can provide real protection to those carrying on business - but there are limits. The Kobes Nurseries Inc. case provides one example of the limits. Directors of a limited company may also be personally liable for unpaid employee wages, unremitted employee deductions and unremitted GST payments. Even so, incorporation can have significant advantages, including tax advantages, for business people.
Article provided by Centennial Law Corp.