LIMITED LIABILITY of an INCORPORATED INDEPENDENT CONTRACTOR
To schedule an appointment, contact our law firm at 403-400-4092 or Chris@NeufeldLegal.com
Limited liability is oftentimes discussed as a primary benefit for an incorporated independent contractor, but it is not absolute (with lenders, companies advancing financing and contracting parties structuring their arrangements to secure the retention of personal liability).
When an independent contractor incorporates its business operations, the corporation becomes a separate legal entity from the individual. This results in the emergence of the legal concept of the "corporate veil," which generally protects the personal assets (such as their home, car, and personal savings) of those individuals involved with the corporation (shareholders, officers, directors) from the corporation's debts, liabilities, and lawsuits.
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Protection of Personal Assets: In most situations, if the corporation faces financial or legal trouble (like business-related lawsuits or bankruptcy), the individual's personal wealth is shielded (recognizing that financial arrangements that have contractual arrangements for individuals to assume personal liability, creates significant exposure of their personal assets).
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Business Debts are Corporation's Responsibility: Creditors can typically only pursue the assets owned by the corporation.
As such, where individuals have not contractually agreed to be personally liable for the actions and debts of the corporation, creditors and other party seeking to collect from individuals involved with the corporation have a difficult legal road, due to the legal protections that are afforded by the "corporate veil." The corporate veil can be pierced in several specific circumstances:
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Personal Guarantees: The contractor remains personally liable for any business loans, credit lines, or contracts that they have personally guaranteed. Lenders often require personal guarantees for small business loans.
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Director/Officer Liability: The owner, as a director or officer, can be held personally liable for certain statutory (legal) liabilities, which may include:
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Unpaid source deductions (e.g., income tax, CPP, EI) for employees.
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Unpaid employee wages (up to a limit, often 12 months, depending on the jurisdiction).
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Failure to remit GST/HST collected by the corporation.
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Personal Torts and Fraud: The individual is personally liable for their own fraudulent, criminal, or tortious (wrongful) conduct, such as negligence or professional malpractice, even if acting on behalf of the corporation. The injured party may sue both the corporation and the individual contractor.
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Piercing the Corporate Veil: While rare, a court may disregard the limited liability if the corporation is found to be a sham or a mere tool used to commit a fraud or wrongdoing, or if the individual has failed to properly maintain the separation between personal and corporate affairs (e.g., commingling funds).
To mitigate the risks that limited liability doesn't cover, incorporated independent contractors in Canada often purchase Commercial General Liability and Professional Liability Insurance (Errors & Omissions).
For an experienced business lawyer capable of provide you with such legal support and strategic direction, contact our law firm at Chris@NeufeldLegal.com or 403-400-4092 to schedule a confidential initial consultation.
