There are many benefits to incorporating your business including tax benefits and reducing liability. Incorporating a business provides protection or a ‘veil’ to shareholders from personal liability, as the corporation becomes legally liable for the actions and finances of the business. Nonetheless, Canadian courts have the capacity to breakdown this veil and make individual parties liable for actions undertaken by a corporation.
What does it mean to pierce a corporate veil?
Piercing the corporate veil will hold individuals operating business under a corporation liable for their fraudulent actions. For example, if a creditor demands payment for a loan from a corporation, a court may “pierce the corporate veil” and hold the stakeholders, such as shareholders and directors, personally liable for the corporation's debts.
In order to “pierce the veil”, it must be established that a corporation is acting illegally, fraudulently or for an improper purpose. Usually this occurs when the corporation has only one or a few individuals acting as shareholders or directors, as it is evident who is directing the corporation’s actions. It is much more difficult to pierce the corporate veil of a large publicly traded corporation, since there are many more shareholders and other stakeholders.
When will courts pierce the corporate veil?
There are a few common justifications for courts to hold the individuals working under a corporation personally liable:
Firstly, if there is no true separation between the corporation and its shareholders, evidenced by, for example, their financial affairs, the court can assert that the corporation is used to avail the financial obligations of its shareholders.
Second, if there is evidence that the company initiates fraudulent or wrongful actions, such as entering into dealings that the corporation cannot afford, or recklessly borrowing money, the court may find individuals of a corporation personally liable for financial fraud.
Lastly, if there is evidence that someone who engaged in business with the corporation is left unpaid, and one of the above scenarios is also present, a court can pierce the corporate veil to rectify the unjust actions.
To avoid having a court ‘pierce their corporate veil’, small businesses should avoid commingling personal and company assets, and establish separate bank accounts that are strictly used for their respective purposes.
Contact our Toronto commercial and corporate lawyer at Cactus Law to learn more about how to best protect your personal and corporate assets.
Disclaimer: The information in this article is provided as general introductory information and should not be relied upon as legal advice.