Does incorporation really protect you personally?

What does limited liability actually protect?

Because a corporation is its own legal person, it can sign contracts, borrow money, and be sued in its own name.

If the corporation leases an office, buys supplies, and then goes bankrupt, the creditors generally cannot seize your personal house or personal bank accounts. Your loss is "limited" to the money you invested into the shares of the company. This is the primary reason high-risk businesses incorporate.

What is a personal guarantee?

Banks and landlords know about limited liability, and they don't like it. If you are a new business with no financial history, a bank or landlord will almost certainly demand that you sign a "personal guarantee" (cautionnement personnel).

By signing this, you personally co-sign the corporate debt. If the corporation defaults on the commercial lease, the landlord can bypass the corporate veil and sue you personally. You must read contracts carefully to see if you are signing as the President of the company, or as an individual guarantor.

Can I be sued personally as a director?

Yes. Directors have statutory liabilities. The government takes tax collection very seriously. If the corporation fails to remit GST/HST/QST or payroll source deductions (DAS) to Revenu Québec or the CRA, the directors are held personally liable for those amounts.

Directors can also be held personally liable for unpaid employee wages up to a certain amount, or for environmental damages caused by the company.

Does incorporation protect me against professional malpractice?

Generally, no. If you are a doctor, lawyer, engineer, accountant or similar professional, incorporating does not shield you from personal liability for your own professional negligence or malpractice.

Clients can still sue you personally for bad advice or errors. You still need robust professional liability insurance (errors and omissions insurance) even if you operate through an "Inc.".