We think about law a lot. Sometimes we even write it down.

See all Entries

Posted on February 21st 2006 in Legal Articles

Corporations – Separate Legal Persons

Corporations – Separate Legal Persons

Incorporation is one way to set up a business. A sole proprietorship or a partnership are two other ways to set up a business and that you are probably most familiar with. One of the key distinctions that sets a corporation apart is limited liability. Unlike a sole proprietorship or a partnership, a corporation is a legal entity that is separate from its owner.

Separate Entity
In the eyes of the law, a corporation is a separate personality, whose acts, rights, duties and liabilities belong to it and not its shareholders. This means that the owner/shareholder of the corporation will not be liable for the business’s debts, obligations or liabilities.

There is nothing improper about taking advantage of the limited liability offered by a corporation so long as third parties are made aware that they are conducting business with the corporation and not the individual(s).

Corporate Veil
Over the years, the courts have been extremely reluctant to pierce this corporate veil. To this day that remains the general rule and it is only in extremely limited circumstances, such as fraud, dishonesty or avoidance of legal obligations, that a court will lift the corporate veil.

Despite a corporation being a separate entity and the court’s reluctance to look behind a corporation, an individual shareholder must be diligent when entering into a transaction that he is not doing so in his personal capacity. To preserve the advantage of limited liability, it is essential when corporate documents are signed, to make it clear that the individual signing does so on behalf of the corporation and not personally.

Tip for Shareholders of Private
We recommend that the following method of signing be used whenever any corporate document is executed:

XYZ Limited

John Smith (signature )
John Smith (name of individual)
President (office held by individual)

Any departure in the foregoing protocol could result in the individual signing the document becoming personally liable for the obligations set out in the document.