Some businesses conduct themselves as sole proprietorships. The business may have a business name but it is owned and operated by an individual who is personally liable to the world at large for the conduct of the business. Some businesses, however, are incorporated. When this occurs, the business enjoys a separate legal personality from its owner called the “corporate veil.” The owner has shares in the company and, if it is a small business, the owner is often the sole shareholder, director, and officer (president) of the company. There are two good reasons to incorporate a business. A company usually enjoys a lower tax bracket than an individual and, most importantly, the owner of the company, as shareholder, director, and officer, is not personally liable for the conduct of the business. This means that personal assets, such as a home, are not at risk.
You may find yourself in a situation as a business person where you finally want to incorporate but there is not enough time to have your lawyer do the paperwork before you sign a contract you are negotiating. You may be negotiating a contract for services relating to your business or an agreement of purchase and sale to purchase a property next to your business. The law under the Ontario Business Corporations Act provides you with a mechanism whereby you may sign the contract as a “pre-incorporation” contract and do the paperwork later for the incorporation. It is important that you sign the contract in such a manner that the other party to the contract knows that the contract will be with a company and not with you personally. Signing the contract with words such as “John Doe on behalf of a company to be incorporated” will satisfy this requirement. At this stage, however, you are still personally bound to perform the contract and entitled to the benefits of the contract.
In order to eliminate your personal liability under the contract, you must take two further steps. You must incorporate the company and the company must adopt the contract. At this point, the company is bound by the contract and is entitled to the benefits of the contract. You are no longer personally exposed under the contract. Under the Business Corporations Act, there is no requirement for a formal adoption of the pre-incorporation contract by the company or formal advice to the other contracting party. The Ontario Court of Appeal has found that even a letter between the lawyers involved is sufficient. All the company is required to do is to have knowledge of the contract and its terms.