One of the basic reasons to set up a Corporation (incorporated business) is to limit your legal liability for business debts that are debts of the corporation.

For example, you set up a construction company and start credit accounts for the company with suppliers of lumber, hardware, fuel, insurance, and the like(trade debts). You are careful to not assume any personal liability by co-signing or guaranteeing the credit accounts or borrowings of the company.

If the worst happens and the business fails, those suppliers only have legal claims against the company, not you. Just because you own the shares of the company or are a director of the company does not make you liable for the company debt.

You are liable for the company’s debt where you made an agreement(almost always in writing) to be liable as described previously by co-signing or guaranteeing.

In limited cases, as a director or former director of a company, due to provincial or federal law, you can be held personally liable for what is referred to as “statutory debts” if the company fails to pay these debts. Examples of this type of debt are unpaid wages, employee remittances owed to Canada Revenue Agency for employee pay deductions, and unpaid company GST.

In some cases, the (share) owner of a company will come to us to see what should be done with the company after the company operation stop. If there are no real assets left in the company, just debts unpaid, we tell the owner that nothing needs to be done except for final tax returns and closing the corporation with government corporate registry. Then we analyze the company debts to see where the owner may be liable.

Prevention is key to your personnel financial health if you own or are considering starting a company. Be aware of what you sign or agree to on behalf of the company which makes it a personal debt, and avoid doing this as much as possible.