Debts for Alberta Business Owners
Quite often, we see business owners who have a belief that because they operate an incorporated business, that the incorporated business shelters them from all liabilities of the business.
While that is true for some types of corporate debt, certain debts incurred in a business may have personal exposure to the individual who owns the business and acts as an officer and/or director of that business.
Debts incurred by a sole proprietor are debts incurred by the individual. There is no distinction between the unincorporated business and the individual who operates it.
An incorporated business is a separate legal entity and as such can incur its own debt. Certain debts incurred by an incorporated business can attract personal liability to the owner by way of either a contract or by statute.
Personal liability for contact debts occurs when the individual gives a personal guarantee for the debt. Giving a personal guaranty means that if the incorporated business cannot pay the debt, the individual will. This form of liability is seen most often when the incorporated business borrows money from a financial institution and the financial institution requires a personal guaranty from the shareholder before it will advance the loan funds. This personal guaranty allows the financial institution to pursue the individual for the recovery of any debt shortfall that is not covered by the recovery it may receive from the corporation.
Statutory obligations are imposed on individuals by a Statute of Law. The most common forms of this type of debt are a director’s liability imposed on the director under the Income Tax Act and the Goods and Services Tax Act. If the incorporated business is not able to pay its employee’s source deductions (that being the income taxes, CPP, and EI that is withheld from the employee’s paycheque) or cannot pay its GST, the director is personally liable for these amounts. In addition, in your capacity as an officer and/or director of a company you may also be exposed to liability for any unpaid salaries/wages to an employee and Workers’ Compensation Benefits. In some cases, a shareholder of the company can be held liable for the unpaid corporate income taxes of the company.