It is true that a limited or incorporated company has a separate and distinct personality from shareholders (owners) for it acquires a juridical personality by operation of law.
Having a separate personality, it can acquire assets and incur liabilities by its own, separate from the owners for it is considered a person in the eyes of the law. Thus, its assets are not the assets of the owner(s) and its liabilities are not the liabilities of the owners.
Incorporated company is also called limited company because shareholders’ liabilities are limited up to the amount of their investments, unlike in a single proprietorship or in a general partnership where its owners are liable to pay the business liability in the event of insolvency up to the extent of their personal assets.
In a limited or incorporated company, it may go bankrupt, but the shareholders assets would not be affected. This is the reason why many businessmen remain affluent despite bankruptcy of their incorporated or limited companies.
Though, by law, shareholders are not liable to pay liabilities of a limited or incorporated company, there are exceptions however, some of the exceptions are if a shareholder signs as a guarantor of a company’s debts, in the event the company defaults on its payment, a shareholder who signs as a guarantor is liable personally; and if a limited company fails to remit withholding taxes, Canada Pension (CPP), and Employment Insurance Premiums to the government, an officer/shareholder of the corporation responsible for the violation is personally liable.
To illustrate my point, a client who operated an incorporated company had a line of credit with a bank in the amount of $25,000.00. Unfortunately, his company went under. As a result, creditors were hounding him being the shareholder and president of the company.
He came to me for he was wondering, why he received a demand letter from the bank requiring him to pay personally for the line of credit of his incorporated company, when in a limited company, shareholders are not personally liable.
Upon looking at his papers, I found out that he co-signed for the company that he was not aware of. As a co-signer, he had no escape but to pay the line of credit from his personal resources.
To protect his credit rating and to avoid court proceedings, he was forced to get a second mortgage against his residential property to pay off the line of credit.
If you are operating an incorporated company, do not co-sign for your company, if you do not want to be personally liable. Otherwise, limited liability would not apply.
Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc. and the author of the book, You Can Negotiate All Your Debts. He also writes a biweekly column, “What Matters In Life” in “Taliba Newspaper. For free initial, professional and confidential consultation, please call 905-306-7572.