PERSONAL ASSET PROTECTION: Advantages of Incorporation
Contact Neufeld Legal for your incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
Corporate owners (shareholders) are capable of realizing personal asset protection by undertaking their business through the corporation, such that the shareholders might protect themselves from personal liability for the corporation's debts or obligations. Such protection (limited liability) rests on the principle that a corporation is a separate legal entity from its owners.
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Separate Entity: A corporation, upon formation, is recognized by law as an entity distinct from its shareholders, directors, and officers. This means the corporation can own property, enter into contracts, incur debt, and be sued in its own name.
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The Corporate Veil: This concept is often referred to as the corporate veil, which is a legal boundary or wall separating the corporation's assets and liabilities from the personal assets of its owners.
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Protection of Personal Assets: Because the business's obligations belong solely to the corporate entity, creditors seeking payment for corporate debts (like loans, contract disputes, or lawsuits) can generally only pursue the assets of the corporation. They cannot seize the owners' personal savings, homes, cars, or other personal property. An owner's liability is typically limited to the amount they invested in the company (e.g., the cost of their shares).
While powerful, this protection is not absolute. Courts can sometimes disregard the legal separation - a process known as "piercing the corporate veil" - and hold the owners personally responsible for the corporation's debts. This usually happens when the corporation's owners or directors have failed to treat the corporation as a true separate entity or have used it for fraudulent purposes. Common grounds for piercing the corporate veil include:
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Commingling of Assets: Blurring the line between personal and business finances, such as using the company bank account to pay for significant personal expenses or depositing personal funds into the business account.
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Failure to Follow Formalities: For a corporation, this means neglecting key operational requirements like holding required board and shareholder meetings, recording minutes, or maintaining separate, accurate financial records.
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Undercapitalization: Establishing the corporation with insufficient funds to meet reasonably anticipated business debts or liabilities, indicating a lack of good faith.
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Fraud or Misconduct: Using the corporation to perpetrate fraud, commit illegal acts, or knowingly evade an existing personal obligation.
As such, limited liability protects personal assets as long as the owners respect the corporate structure and treat the business as a genuinely separate legal person.
So if you are looking to incorporate a new corporation or deal with the corporate legalities impacting your company, contact our law firm to schedule a confidential consultation with a lawyer experienced in the legal intricacies of business incorporation and commercial business development at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.
