Business & Finance

Avoiding Personal Liability – The Importance of Observing Corporate Formalities

Personal Liability
Written by Peter

Most small business owners understand the importance of shielding themselves against personal liability arising from their corporate activities. Notary Public Mississauga counsel their corporate clients to observe recognized corporate formalities to avoid “piercing of the corporate veil” which could leave business owners personally liable for the liabilities of their businesses.

For example, many new business owners are not aware that comingling of personal and business funds can have dire consequences. In order to avoid this, we suggest that our clients establish and fund business bank accounts before they conduct their first corporate transaction. Case law has established that business owners who use their business accounts for personal expenses might be liable for commingling.

Next, it is important that accounting records be well maintained and kept up to date and that the company is adequately capitalized so that it is able to cover its liabilities. For instance, if a company is ordering on credit without the means of paying its suppliers, the owners might be later found personally liable if the business later defaults. Also, this helps avoid comingling of accounts between business and personal.

Insurance is also important and we recommend that our clients obtain a Commercial General Liability Policy as well as Director and Officer insurance prior to beginning operations. Again, if your business is not adequately insured, the possibility of personal liability is very real.

Finally, good record-keeping and staying up to date with the Secretary of State is an ongoing obligations. If a business fails to file its annual report, it may lose its “good standing” status, which essentially wipes away its corporate shield.

These examples are not intended to provide an exhaustive list of corporate formalities and business owners are encouraged to consult with a corporate attorney to make sure they are in compliance with all formalities recognized by law and seek the help of any Independent Legal Advice (ILA) to seal it.

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