Please note that the information provided herein isnot legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to creating a limited liability company, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto business lawyers registered on the website who can answer your questions or help you draft and submit articles of incorporation for Ontario or Federal corporations.
Limited liability companies are business that have been incorporated under a particular jurisdiction (e.g. Ontario, Federally) and which have a separate legal existence from their incorporators, shareholders, managers, and employees. They are called limited liability companies because the personal liability of the shareholders is limited; only in limited circumstances will a court pierce or lift the corporate veil to impose personal liability on the corporate shareholders.
Specifically, courts have found that the following situations may warrant the lifting of the corporate veil and the imposing of personal liability on shareholders:
- Sham/Cloak/Conduit/Alter Ego: Where there is a controlling shareholder or a one-man company, the company is not an alias for the owner per se. Due regard must be had to the law of principal and agent relation to the formation of the relationship. Whenever anyone uses control of the corporation to further his own rather than the corporation’s business, he or she may be liable for the corporation’s acts.
- Tort claims: Limited liability is fundamentally unfair to tort victims and other involuntary creditors and has undesirable consequences for labour claimants with severe informational disabilities and lack of ability to diversify and to absorb loss (source: Phillip I. Blumberg, Limited Liability and Corporate Groups, 11 J. CORP. L. 573, (1986) at pp. 616-19). As Anthony VanDuzer noted in Law of Partnerships and Corporations: “Courts have held that they have the power to ignore the separate existence of the corporation where to fail to do so would yield a result which is ‘flagrantly opposed to justice’….One could say that the courts are likely to be more sympathetic to claims by third parties, such as creditors and tort victims…”.
- Improper purpose: If a corporation is formed solely for an illegal, fraudulent, or improper purpose, then that company will be a mere cloak or sham. Some improper purpose examples include: (1) a corporation was formed to solicit customers which the incorporator could not personally solicit due to non-solicitation agreement with previous employer; (2) person conveyed a house to a company to preclude selling it; and (3) corporation with no assets gave an undertaking to the court to gain an advantage for the controlling shareholders.
- Thin capitalization: Ownership of all or almost all of the shares of a corporation by one individual, coupled with inadequate capitalization, may provide sufficient grounds for disregarding the corporate entity.
- Representations of unlimited liability: If a firm represented that its liability is unlimited, a subsequent assertion of limited liability would constitute fraud, and the veil may be lifted.
- Lack of respect for the corporate form: lack of proper corporation authorization for transaction and the use of shareholder funds to pay corporate obligations has been cited in some cases as supporting the disregard of corporate personality. Some courts have found such grounds insufficient to lift the corporate veil.
Limited liability corporation are created via submitting Articles of Incorporation.
Please note that the information provided herein isnot legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to drafting or reviewing Articles of Incorporation, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto business lawyers registered on the website who can answer your questions or help you draft and submit articles of incorporation for Ontario or Federal corporations.
In this blog, I’ll be discussing articles of incorporation for Federal corporations, which are governed by the Canada Business Corporations Act. Not many people realize this, but corporations are creatures of statutes. The theory is that citizens vote in politicians, who in turn create legislation, which is then used by citizens to create corporations to limit their liability, gain access to capital, expand their business, etc.
“Articles of Incorporation” is the name of the document that must be submitted to the Federal Government to create a corporation. A corporation is a separate and distinct legal entity from its incorporators and from its owners, managers, employees, etc. A corporation has its own rights and obligations; must file its own taxes (at both the provincial and federal levels); has its own income, assets, and liabilities; and can be sued and sue other parties. These things being said, a corporation must act through other parties (e.g. owners, managers, employees, directors, etc.), who can in turn be held liable for their actions (e.g. negligence, breach of contract, etc.), although the corporation will likely be sued in these circumstances because of things like vicarious liability, insurance, and its otherwise deep pockets.
The Articles of Incorporation must provide the following information to be valid (s. 6 of the Act):
- The name of the corporation;
- The province in Canada where the head office of the Corporation is to be situated;
- The classes and any maximum number of shares that the corporation is authorized to issue (and the characteristics of such shares);
- If the issue, transfer or ownership of shares of the corporation is to be restricted, a statement to that effect and a statement as to the nature of such restrictions;
- The number of directors or the minimum and maximum number of directors of the corporation; and
- Any restrictions on the businesses that the corporation may carry on.
The Articles of Incorporation may also set out additional provisions permitted by the Act or by law to be set out in the corporate by-laws (for the purpose of this blog, I won’t get into this here).
With respect to the different classes of shares, it’s always best to keep things simple: most small private companies have two classes of shares (one preferred and one common) and have the ability to issue an unlimited number of shares, but only issue common shares. The preferred shares are left for estate freezes and other tax-savings structures for the shareholders (which I won’t get into here).
Typically, the Articles of Incorporation of a small private corporation will not impose any restrictions on the business of the corporation (otherwise, if the corporation engages in such business later on, liability could arise for breaching the Articles of Incorporation). Also, amending the Articles of Incorporation is not easy if there are many shareholders (because two-thirds of the votes cast by the shareholders entitled to vote is required): s. 173.
Please note that the information provided herein isnot legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to litigation, you should seek professional assistance (e.g. make a post onDynamic Lawyers).
Keeping with our example of Explosion Proof Refrigerator Inc., the question may arise: who exactly can I sue if the explosion proof refrigerator I purchased turns out to be defective thereby causing losses and damages? Well, let’s look at the options. First, you may be able to sue the corporation itself, which is a separate and distinct legal entity from its directors, managers, employees, owners, etc. Second, you may be able to sue the directors themselves or the officers who run the company on a day to day basis. Third, you might think of suing employees, contractors, representatives, agents, etc. who worked or were employed by the corporation. Finally, you may be able to sue – in limited circumstances – the shareholders of the corporation. Those limited circumstances could include: the corporation was a mere agent or alter ego of the shareholders, the corporation was a sham/fraud, or the corporation was created to do something that would otherwise be illegal.
In any event, you should always speak to a lawyer to determine who you can sue and for what. Basically, the lawyer will want to know (1) who can be blamed (2) for what and (3) if that party is culpable, will they be able to pay damages? If a party like a low-level employee is incapable of compensating someone for damages (even though they may be to blame) it may not be worth suing them. This means that the party is judgment proof. Rather, the corporation with the deep pockets could be sued for vicarious liability, which attributes the liability of the employee to the corporation who employed him or her.
Suing the directors may be an option and one way to do it is through the governing business law legislation. In Ontario, if the corporation (i.e. Explosion Proof Refrigerator Inc.) was incorporated under the laws of Ontario pursuant to the Business Corporations Act, then the directors will have to meet a standard of care in discharging their duties or else face getting sued. That standard of care requires them to act honestly and in good faith with a view to the best interests of the corporation and to exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances. Breach of this standard may result in director liability.
Finally, with respect to the shareholders, notwithstanding the aforementioned limited circumstances in which a person may be able to sue them, their liability is generally limited. This means that piercing or lifting the corporate veil to expose the personal assets of the corporate shareholders is not easy.
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