Understanding Your Liability When Incorporating Your Business

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Business owners often think that if they incorporate their business they have protected themselves from any sort of liability.  While an incorporated company does provide a ‘corporate veil’ that can provide some protection, small business owners must be aware that in many instances they may still be required to accept personal responsibility for the business.

Small business owners can expect many creditors to require personal guarantees.  These guarantees will almost certainly be required for any bank loans and commercial leases and can also be required for many commercial contracts, including the purchase of merchandise that the business may be selling.  Should the business be unable to repay any of these loans the business owner will be held personally liable, even though the company is incorporated.

If you incorporate your business you will (almost always) be a director of the company and that role will also expose you to other potential liabilities such  as some unpaid employee wages and tax remittances.  If the company were to default on any of these obligations then the directors can be held personally liable.  A commercial insurance broker can provide some helpful guidance on the types of insurance coverage your business should have to protect the directors and officers from other potential liabilities such as errors and omissions.

To help reduce your personal exposure you can consider transferring personal assets out of your name prior to commencing business.  A common example is transferring the title to your home to a spouse (which has its own risks should there be a breakdown in the marriage).   If you are going to use this as tool to limit your exposure it must be done early in the business establishment process and not after an imminent problem has already arisen, as this is prohibited in most instances.

Mike D’Aloisio