Are shareholders legally responsible for paying debts of the company?

In today’s world, companies play an integral role in our society. People work as employees of companies and people have funds invested in companies through their pensions, mutual funds or owning shares directly.

Shareholders of a company are the owners of the company. However, does that mean that the shareholders are legally responsible for paying debts of the company? Are all of those people who have invested their money as shareholders of companies legally at risk for paying the companies’ debts? In order to answer these questions, we must first understand what companies are.

What is a company?

A company is a separate legal entity that is distinct from its owners. It is created through legislation, in Canada, there are both provincial and federal companies depending on which legislation is used to create the company. The process of creating a company is referred to as “incorporation”. The term ‘company’ and the term ‘corporation’ are often used interchangeably.

As a separate legal entity a company can, in its own name, do such things as buy a car, own a piece of real estate, borrow money from a bank, sue or be sued.

Who are the owners of a company?

The owners of a company are called shareholders. There may be multiple shareholders of a company or there may be just one shareholder. Whether there are multiple shareholders or just one, it is important to note that they do not own the assets of the company, they own the company that owns the asset. Again, a company is a separate legal entity that can own assets under its own name.

Are shareholders legally responsible for paying the debts of the company?

No, a shareholder is not legally responsible for paying the debts of the company because the company and the shareholder are separate legal entities. As such, a lender who has loaned money to the company cannot force the shareholder to repay the loan unless the shareholder has personally guaranteed the loan.

If you require further information on shareholder’s liability, please do not hesitate to contact M.J. O’Nions Lawyers & Mediators as we would be honoured to be of assistance.

Please like & share: