Limited liability

How BC law treats it

Under the Business Corporations Act, SBC 2002, c 57 (BCBCA), a company is a legal person separate from its shareholders, and s. 87 provides that a shareholder is not personally liable for the company's debts, obligations, defaults or acts except as the Act provides. The principle of separate personality goes back to Salomon v A Salomon & Co Ltd, [1897] AC 22 (HL). Shareholders risk what they paid for their shares. Unlimited liability companies under the BCBCA are an exception, since their shareholders can be liable for company debts on liquidation. Limited liability protects shareholders as shareholders. It does not protect anyone from liability for their own wrongs or promises. A shareholder who signs a personal guarantee is liable under it. Directors face specific statutory liabilities, for example for up to two months' unpaid wages under the Employment Standards Act, unremitted source deductions under Income Tax Act s. 227.1, unremitted GST under Excise Tax Act s. 323, and improper distributions under the BCBCA. A person who personally commits a tort, such as fraudulent misrepresentation, is liable for it even if acting for the company. Canadian courts rarely pierce the corporate veil. The BC Court of Appeal in Edgington v Mulek Estate, 2008 BCCA 505 confirmed that the veil is pierced only where the company is used for fraud or improper conduct; mere control by the shareholder is not enough. Poor record keeping or failure to observe formalities is not enough on its own, unlike the more flexible US approach. Partnerships give limited liability only to limited partners and, in some respects, partners of a limited liability partnership under the Partnership Act, RSBC 1996, c 348.

What it means for your business

Limited liability is the main reason BC owners incorporate. It keeps business losses and lawsuits away from personal homes and savings, and it lets investors fund a company knowing their risk is capped. Owners should understand that banks and landlords often ask for personal guarantees, which bypass the protection, and that directors carry their own statutory risks. Signing documents clearly in the company's name and keeping the company properly funded and documented preserve the protection. Example: A Richmond restaurant company closes owing its supplier $80,000. The shareholders are not liable for the debt, but the founder who signed a personal guarantee in the supply agreement can be sued personally for the full amount.

Risks and common mistakes

Signing contracts personally or without showing the company's name, so the individual becomes the party. Signing a personal guarantee without negotiating a cap, an expiry date or release on sale. Assuming limited liability covers directors' statutory liabilities for wages, source deductions and GST. Believing that failure to keep minute books current will automatically let creditors pierce the veil, while ignoring the real risk of personal guarantees. Choosing an unlimited liability company for tax reasons without appreciating that shareholders can become liable for its debts.