December 17, 2018

Incorporating Your Business: Liability Considerations

G+G Corp 

There are many positive reasons to incorporate your business or professional practice. The main reason lawyers recommend clients consider incorporating is to limit personal liability with respect to the corporation’s actions. Unlike a sole proprietorship or a partnership, a corporation is a separate legal entity. Often shareholder’s liability exposure in a corporation is limited to the amount they have invested in the corporation, thereby protecting their personal assets.

As a general rule, directors of a corporation are not personally liable for the contracts of, or actions or omissions of, the corporation. It is important to note, however, that the director of a corporation will have personal liability in relation to some aspects of the corporation. For instance, directors have joint and several liability to the employees of a corporation for debts not exceeding six months’ wages and up to 12 months’ vacation pay. Directors also have liability to the federal and provincial governments for failure to make the appropriate filings after having collected under tax law, or if the corporation has failed to collect under tax law altogether.

Essentially, a director of a corporation can be held personally liable in cases where the Minister of Finance cannot recover amounts from the corporation or when the corporation goes bankrupt and HST or employee wages and deductions go unpaid. A director may not be held personally liable if it has been at least two years since they acted as director and have documentation to prove this fact. It is possible to get director’s liability insurance to indemnify a director against these liabilities.

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