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 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.
However, courts may “pierce the corporate veil” by setting aside the separate legal personality of the company and attaching personal liability to the shareholder, director, or officer. Courts in Canada are extremely reluctant to pierce the corporate veil. The dominant rule is that company decision makers, acting in good faith, should not be personal liable for the acts of the company.
There are exceptional circumstances when the corporate veil will be lifted to create personal liability. One exception is when a company is found by the court to have been incorporated to do something that is illegal or improper for its shareholders to do personally, such as to commit fraud or to avoid legal obligations. Fraud may occur when there is a misrepresentation to a third party that the third party is dealing with an individual with assets when, legally, the third party is really dealing with a company with no assets. As well, a company may have a legal obligation to a third party, such as a debt, but transfers its assets to the shareholders in order to render itself incapable of fulfilling the legal obligation. Another exception is the “sham” company, that is, when the company is nothing more than the “alter ego” of the shareholder and being used as a shield for an improper purpose. The test is usually whether the company is completely dominated and controlled by a single person.
These exceptions are often applied in conjunction with a vaguely defined principle of unfairness before a court will pierce the corporate veil.