CORPORATE VEIL - At the Core of Legal Protection
Contact Neufeld Legal PC for your incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
The corporate veil is a legal principle that establishes a corporation as a separate legal person distinct from its owners (shareholders), directors, and officers. This separation is fundamental to modern business law.
The corporate veil's primary function is to provide the benefit of limited liability to the business's owners (shareholders).
A. Limited Liability for Debts
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This is the most significant protection. It means that the personal assets (like a house, car, or personal bank accounts) of the shareholders and owners are generally protected from the company's debts, legal liabilities, and financial obligations.
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If the business incurs debt or is sued, only the assets of the company are typically at risk.
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A shareholder's financial risk is usually limited to the amount of their investment in the company (the money they paid for their shares or membership interest).
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B. Encouragement of Investment
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By limiting personal risk, the corporate veil encourages individuals to invest in and start new businesses without the fear of losing their entire personal net worth if the business fails.
C. Separate Legal Identity
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The corporate entity can enter into contracts, own property, sue, and be sued in its own name, independent of the people who own or run it. This provides clarity and stability in business dealings.
The protection offered by the corporate veil is not absolute. Courts can "pierce the corporate veil" (or "lift the corporate veil"), which is a legal decision to disregard the separate legal status of the company and hold the owners, directors, or officers personally liable for the company's debts or actions.
Courts are generally reluctant to pierce the veil, but they will do so if they find that the corporation's separate identity has been abused, which typically involves two key factors, often referred to as the "alter ego" theory or a similar test:
A. Unity of Interest and Ownership (Alter Ego)
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The owners or directors have treated the corporation as an extension of themselves rather than a separate legal entity. This includes:
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Commingling of Assets: Using the company's bank account to pay personal expenses, or vice-versa.
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Failure to Observe Corporate Formalities: Not holding required director and shareholder meetings, failing to keep proper corporate records, or not issuing stock.
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B. Fraud, Inequity, or Wrongful Conduct
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Adhering to the corporate separation would sanction a fraud, promote an injustice, or be contrary to public policy. This often involves:
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Using the corporation to evade an existing personal obligation [more on evasion].
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Incorporating for a fraudulent or illegal purpose [more on fraudulent and illegal purposes].
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Undercapitalization: Creating the company without enough money to meet its reasonable, foreseeable business obligations.
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To maintain the protection of the corporate veil, business owners must consistently treat the company as a separate legal person by adhering to all corporate formalities and keeping business and personal affairs strictly separate.
If your business is seeking experienced professional legal representation with respect to incorporating a new corporation or dealing with the corporate legalities impacting your company, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.
