In a partnership, partners are responsible for each other’s actions and equally participate in a complex process of the partnerships management – meaning that any serious business decision requires the involvement and consent of all partners. In a corporation, shareholders do not have similar responsibilities and the shares can be transferred at will without reference to other shareholders. This free transferability is a very attractive feature of corporations, however, some non-distributing corporations now put restrictions on share transfers as a measure of control, which may be written in the provisions or shareholders’ agreements.

Although the death of a shareholder does not lead to the death of a corporation, the latter still can be dissolved due to a number of causes. When a corporation goes through the process of bankruptcy and cannot repay its debts, it will be terminated by operation of law. Similarly, the court decision can dissolve a corporation where it deems it proper to do so. The shareholders themselves can vote to bring the corporation to an end when they feel it is appropriate. But the more common way is for the corporation simply to fail to file the required annual reports – in such a case, it will eventually be considered inactive and removed from the registry. It still can be restored if the missing reports are filled and submitted post-factum.

There are a number of advantages associated with incorporation, most of which are based on the fact that the corporation is a separate legal personality. Today, let us have a look at the topic of limited liability – one of the most prominent pros of incorporation, at least at the first look.

As the corporation represents a separate legal entity, its shareholders are not liable for corporate debts and obligations – in other words, the corporation is fully responsible for its own wrong conduct. The shareholders’ liability is limited only to the amount they have paid for their shares. If the corporate assets are not sufficient to satisfy the obligations, the debt cannot be derived from the shareholders.

In view of the above, there is no doubt that limited liability is one of the most attractive qualities of the corporation – sometimes to a degree that it becomes the main reason for choosing to incorporate. However, such an advantage can often be seen as an illusion, because funders and creditors of a small, not-distributing corporation will always look for the ways to protect their investments. Any fund-providing institution will insist that certain principals of the firm (the president, the major shareholder, etc.) should give some guarantees to ensure indebtedness of the corporation. This effectively eliminates any advantage of limited liability for those asked to sign such a guarantee, as limited liability is lost when personal guarantee is given.

At the same time, the concept of limited liability seems very attractive in case of unexpected liability – for example, if a corporation employee causes another injury due to neglect. In accordance with the law, in such cases of unexpected liability the injured party does not have a right to either derive any financial advantage from the shareholders or sue them. Similarly, if the corporation fails to honour its contractual obligations, the shareholders do not have to provide compensation. Also, the principle of limited liability is usually applied to the relationship between suppliers of materials and the corporation: the suppliers cannot legally obtain any personal commitment from shareholders, nor can suppliers turn to shareholders for payment if the business becomes insolvent.

Sometimes even this amount of limited liability could be in question, because now the courts are more willing to look behind the corporate veil and hold the principals liable for the obligations of their corporations. In many cases, the court decision will largely depend on the reputation of the corporation – on its any taint of wrong actions or avoidance of honourable obligations.

“An ounce of prevention is worth a pound of cure”

When you enter in a business with another person, you do not expect that your business will break down because of a dispute. However, in a corporate environment which involves shareholders and more than one partner, just like in a marriage, everything is possible – your partner(s) might get injured, divorced, or may die. This is why, in order to reduce the negative outcome of a possible business break-up in a future, it is crucially important to be legally prepared for any stressful situation that can arise between you and your business partner(s).

First of all, surround yourself with a team of professionals, such as accountants, financial advisors, marketing experts, and, of course, good lawyers. Before starting incorporating your business, get the lawyer’s help in drafting an agreement between yourself and your partners and other shareholders to establish a model on how you want to work together. The agreement should also stipulate the situation when an additional partner or party enters the business. When you have such a contract that structures all sides of your corporate business, foresees any possible changes and provides ready mechanisms of dispute solving, your business is safe and insured from any risks.

In many States of the United States and some Provinces of Canada the majority of companies are incorporated under the Business Corporations Act, or BCA, which sets minimum obligations for the officers and shareholders. Unfortunately, in many dispute cases BCA does not provide a substantial legal base.

A good example of a solid agreement is the Unanimous Shareholder Agreement (U.S.A.), which is directed towards incorporated companies. The U.S.A. is very helpful in instances involving such disputes as the death or disability of your partner. Also, it can restrict the power of the directors to ensure that the shareholders exercise their control over the business. There is virtually no limit to what can be included in U.S.A. You can customise the agreement and set the parameters of how you will deal with different legal situations so that there are no “unforeseen circumstances” to hamper your corporate business.