Limits of a Corporation's Limited Liability
Contact Neufeld Legal for your incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
There are limits to a corporation's limited liability, with this legal protection not being absolute and having several important limits, both for shareholders and for directors and officers, such that corporate stakeholders need to recognize the limitation of the corporate structure and their own personal exposure in a multitude of circumstances.
Limits on Shareholder Liability
Shareholders, as owners of the corporation, risk only the amount they invested to purchase their shares, but there are exceptions:
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Personal Guarantees: This is the most common and practical limit. For smaller or newer corporations, banks and other creditors often require personal guarantees from major shareholders or directors before lending money. If the corporation defaults, the individual who signed the guarantee is personally liable for the debt.
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Piercing the Corporate Veil (Lifting the Corporate Veil): This is a rare, exceptional remedy where a court will disregard the separate legal entity of the corporation and hold the shareholders personally liable. This usually only occurs when:
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the corporation is completely dominated and controlled by the individual(s), and
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the corporation is being used as a shield for fraudulent, dishonest, or improper conduct (e.g., to evade existing legal obligations).
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Unanimous Shareholder Agreements: If shareholders enter into a unanimous shareholder agreement that restricts the powers of the directors, those shareholders may assume the liabilities and duties of the directors for the areas they've restricted.
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Statutory Liability for Specific Corporations: In some provinces (Alberta, British Columbia, and Nova Scotia), a corporation can be created as an Unlimited Liability Company (ULC). The shareholders of a ULC have unlimited liability for the company's debts, usually upon liquidation, in exchange for certain U.S. tax benefits.
Limits on Director and Officer Liability
Directors and officers, as the managing minds of the corporation, can face significant personal liability, often imposed by various statutes:
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Unpaid Corporate Taxes: Directors can be held personally liable by the Canada Revenue Agency (CRA) for failure to remit amounts withheld from employees, such as:
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Employee income tax withholdings
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Canada Pension Plan (CPP) contributions
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Employment Insurance (EI) premiums
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Unpaid Employee Wages: Directors and officers can be held personally liable for a limited amount (often up to six months) of unpaid employee wages under federal or provincial employment standards legislation.
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Environmental Offences: Directors and officers can be personally liable for environmental contamination or offences committed by the corporation if they directed, authorized, or acquiesced in the commission of the offence.
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Breach of Fiduciary Duty: Directors must act honestly and in good faith with a view to the best interests of the corporation. They can be liable for breaches of this duty or the duty of care (failure to act as a reasonably prudent person).
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Oppressive Conduct: Directors may be liable to shareholders or creditors under the statutory "oppression remedy" if they act in a manner that is unfairly prejudicial to the interests of a security holder, creditor, director, or officer.
To reduce one's legal exposure to liability for certain statutory debts (like unpaid tax remittances), a director often has a "due diligence" defence - demonstrating they exercised the care, diligence, and skill that a reasonably prudent person would have exercised in comparable circumstances.
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.
