SEPARATE LEGAL ENTITY: Advantages of Incorporation
Contact Neufeld Legal for your incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
The legal concept of a corporation being a separate legal entity is a foundational principle of corporate law, meaning that once a business is formally incorporated, it is treated as a distinct "person" in the eyes of the law, entirely separate from its owners (shareholders), directors, and officers.
Key Implications of Separate Legal Entity
The establishment of a corporation as a separate legal entity gives it several fundamental legal capacities and shields its owners from personal liability:
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Limited Liability for Owners: This is the most significant consequence. A shareholder's personal assets are protected from the corporation's debts and liabilities. Their financial risk is generally limited to the amount of capital they invested (i.e., the value of their shares). Creditors of an insolvent corporation generally cannot pursue the personal wealth of the shareholders [see also limits of limited liability].
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Capacity to Contract: The corporation can enter into contracts in its own name, not in the names of its owners or managers.
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Ownership of Property: The corporation can buy, own, and sell property (real estate, equipment, intellectual property, etc.) in its own name. The assets belong to the corporation, not the shareholders.
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Right to Sue and Be Sued: The corporation can sue or be sued in a court of law in its own name. Legal actions are directed against the company itself, not the individuals who run or own it.
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Perpetual Existence (Continuity): The existence of the corporation is independent of its owners. It can continue indefinitely despite the death, withdrawal, or transfer of shares by its shareholders.
The Corporate Veil
The separation between the corporation and its owners is often described as the corporate veil. This "veil" shields the individuals behind the company from personal liability for corporate acts.
While the corporate veil provides strong protection, courts in certain, limited circumstances may "pierce" or "lift" the corporate veil. This means the court will disregard the separate legal identity of the corporation and hold the shareholders, directors, or officers personally liable for the company's debts or actions. This exception is typically reserved for extreme cases involving:
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Fraud or Misconduct: Where the corporate form was used to perpetrate a fraud or conceal a crime.
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Sham or Façade: Where the company is merely a pretense or a tool used to evade an existing legal obligation.
The landmark case that established and confirmed the principle of the separate legal entity in common law is Salomon v. Salomon & Co Ltd (1897).
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.
