For small business owners, you take a serious risk if you fail to include the full corporate name on all contracts, invoices, negotiable instruments and orders for goods or services. Using a trade name by itself is not sufficient.
Incorporating is an important step for many small business owners. While it comes with a number of benefits, the main reason many business owners choose to incorporate is protection from personal liability.
At law, a corporation is a separate legal entity (technically considered a “person” at law) from its owner. A corporation can own property, enter into contracts, and sue (or get sued) just like any other person. If a corporation accrues debt, that debt is owned by the corporation itself. This gives a business owner important protection, since liability and debts connected to the business will generally not attach to the owner personally.
However, there is an extremely common mistake made by small business owners that can nullify these protections offered by incorporating. That mistake is failing to make use of the full corporate name when doing business.
Put simply, everyone doing business through a corporation has an obligation to notify third parties of the existence of that corporation. Failing to do so can result in personal liability for the owner of the business.
The source of the requirement to use the full corporate name is the Business Corporations Act. While the exact section will vary from jurisdiction to jurisdiction, there is generally a requirement across Canada for a corporation to set out its full name on all contracts, invoices, negotiable instruments, and orders for goods or services.
The reason behind this is straightforward: to let others know that they are doing business with a corporate entity. Without such notice, if you hire someone, it is natural to expect that the work will be done by the human being standing in front of you. And you would seek redress from that same human being if something goes wrong. But if they are actually operating through a corporation, they have an obligation to let you know.
The consequences of failing to comply with this requirement have been discussed by Courts across the country, including in the North. The landmark decision in Alberta is CHED-CKNG FM v Goose Loonies Inc, 1995 CanLII 9116 (ABQB) (hereafter “Goose Loonies”). In that case, the owner of a nightclub hired the Plaintiff to do certain advertising work. While the nightclub was operated through a corporation, the Defendant failed to identify this fact for the Plaintiff. The formal corporate name was never used.
When the relationship broke down and the Plaintiff sued for payment, it sued the individual (human being) who hired them.
The Defendant attempted to argue that he should not be personally liable for the debt, since the night club was operated through a corporation. The Court disagreed with the Defendant.
The Court held that the onus was on the Defendant to notify the Plaintiff that it was operating through a corporation. As noted, the Business Corporation Act expressly requires this. Because this requirement was not complied with, the Plaintiff was entitled to assume that it was being hired by the Defendant personally.
The law states that if you want the protections associated with using a corporation, you have to let others know that this is the type of entity they are dealing with. If you don’t, then the law can hold you personally liable.
One related issue which is commonly misunderstood (including occasionally by lawyers) is the application of this law when it comes to trade names.
In a very typical scenario, a business owner will incorporate a numbered company, such as 12345 NWT Ltd. That person will then choose to use a trade name, such as “Joe’s Cabinets”, for business purposes. Naturally, a trade name like “Joe’s Cabinets” is catchier and easier to remember than a name like 12345 NWT Ltd.
If you choose to register your trade name, then the name gets recorded at the corporate registry. So the question is, is putting the trade name on your business documents sufficient notice that you are operating through a corporation? Would this protect a business owner in a situation like the Goose Loonies case?
The answer is clear: A trade name is not the same as a corporate name, and a full corporate name must be used. Trade names can be used in addition to the formal name, but they are not a substitute for the corporate name.
The Goose Loonies decision directly addressed this point, as the Defendant used the trade name ‘Goose Loonies’ on its documents and cheques. He tried to argue that this gave the Plaintiff sufficient notice that he was operating through a corporation. However, the Court conclusively disagreed.
There are two main reasons why disclosing a trade name is not sufficient notice that you are operating through a corporation.
The first is the fact that a trade name does not actually tell a customer that they are dealing with a corporation. A trade name may be registered to a corporation or a natural person. So the fact that a business is using a trade name does not, by itself, tell them what sort of entity they are dealing with.
By contrast, the name of every corporation is required to contain an element that identifies it as a corporation. There are several ways that this can be done, but every corporation needs to include one of the following in its name:
- “Limited” (or the French version “Limitée”)
- “Incorporated” (or the French version “Incorporée”)
- The abbreviated forms of any of the foregoing (“Ltd.”, “Ltée”, “Inc.” or “Corp.)
A second reason why using a trade name is not sufficient is because it is simply not practical to expect customers to conduct a trade name search for every company they intend to do business with. The average customer does not have easy access to the registry (if they even know that such a registry exists at all). Thus, even if that trade name is registered to a corporation entity, a customer is unlikely to ever discover this.
Registering a trade name is all about protecting the trade name itself. It helps ensure that nobody else will open a business under the name “Joe’s Cabinets” and steal your customers. If someone did so, you would have a potential claim against them.
Application of Law in the North
The principles outlined in Goose Loonies apply in the North as well. Specifically, in Iqaluit Enterprises Ltd. v. Lem, 2009 NUCJ 16 (hereafter “Iqaluit Enterprises”), the plaintiff contracted to supply food to the defendant’s catering business. The defendant was operating under the trade name Nunavut Catering & Consulting Services (NCCS), which he had duly registered.
One year into the contract, the defendant incorporated as a numbered company, and then shortly after changed the corporate name to “Nunavut Catering and Consulting Services Inc.” (NCCS Inc). Business between the parties continued, and the defendant kept using the name NCCS to conduct business and to advertise, occasionally using the name NCCS Inc. Years later, the defendant failed to pay the plaintiff, and the plaintiff sued. The defendant argued he should not be held personally liable, and that the debt was owed by the corporation rather than him personally.
The court determined that the defendant’s failure to consistently use the formal corporate name meant he was personally liable. Under Nunavut’s Business Corporations Act, corporations must use their corporate name on all contracts, invoices, negotiable instruments and orders for goods or services. The court reached the same conclusions as the Court in Goose Loonies. The Defendant failed to notify the Plaintiff that they were doing business with a corporation, and using a trade name did not qualify as notice of the existence of a corporation.
The case of Iqaluit Enterprises makes it clear that the principles enunciated in Goose Loonies apply equally in the Canadian North.
For small business owners, the key takeaway from these cases is that you take a serious risk if you fail to include the full corporate name on all contracts, invoices, negotiable instruments and orders for goods or services. Failing to do so can lead to personal liability and could undermine the very reasons you chose to incorporate in the first place.
A secondary takeaway is the fact that using a trade name (even if it is properly registered) is not sufficient to avoid this outcome. A trade name by itself does not tell third parties whether they are dealing with a corporation, and it is impractical to expect customers to check the registry to see who a trade name is registered to. Thus, it is vital for you to use your formal corporate name on all contracts, invoices, negotiable instruments and orders for goods or services.
If you have questions about incorporating, trade names, or company liability, Field Law has lawyers in Alberta and the NWT who can help. Reach out to Matthew Turzansky if you need assistance incorporating your business or registering a trade name.
Special thanks to Catherine Ford, Field Law Summer Student, for assistance authoring this article.