When entering into a new commercial relationship, especially in cross-border transactions or where stakes are high, it is important to take steps to verify the legal forms and legal names of your contracting parties.
Don’t Assume Your Contracting Party Is a Corporation
As discussed in our earlier post, Legal Forms of Foreign Entities Doing Businesses in Canada vs. China, not all businesses are incorporated. Yet many clients mistakenly assume their contracting parties are corporations. In reality, sole proprietorship are the most common structure for entrepreneurs starting out. Partnerships, particularly limited partnerships, are also widely used in certain investment contexts due to their “flow-through” tax treatment.
Don’t assume your contracting party is a corporation—always confirm its legal form before you start negotiating, and certainly before signing.
Why Legal Form Matters
Your contracting party’s legal form determines both their responsibilities and your legal remedies. The parties to be named in a legal proceeding—i.e., who can be sued—will vary depending on the structure:
- A corporation is a separate legal entity. Its liability typically rests with the entity itself, not its shareholders.
- Sole proprietorship has no legal separation; the owner is personally liable for all business obligations.
- General partnership also lacks separate legal personality. General partners share unlimited, joint and several liability.
- A limited partner’s liability is typically capped at their investment, provided they remain passive in control of its management.
Misidentifying the legal form can result in failed enforcement, unrecoverable judgments, and unnecessary legal costs.
Don’t Confuse Trade Names with Legal Names
Businesses often operate under trade names that differ from their legal names. Using trade names in contracts can create ambiguity and confusion—particularly when dealing with business groups.
For example, imagine a business operating under the trade name “Tundra Group.” Contract managers may casually refer to “Tundra Group” as encompassing the entire enterprise, including affiliates and subsidiaries. However, under that umbrella, there may be distinct entities: an operating company, a real estate holding company, and a management services company. If the intention is to bind only the operating company, the contract must use its precise legal name, not the general trade name.
To avoid disputes, always ask your contracting parties to use and confirm use their full legal names in writing. In Ontario, businesses are legally required to include their legal names on all contracts, invoices, negotiable instruments, and orders for goods or services.
Conclusion: Due Diligence Is Your Safeguard
Before signing any agreement, conduct due diligence to confirm both the legal form and legal name of your contracting party. For high-stake contracts, we always recommend running corporate searches through Corporations Canada or relevant provincial registries to verify legal status and ensure the entity is in good standing. Depending on the context and clients’ needs, additional searches can be conducted to verify any trademarks or patents that the contracting party claims to own or has the right to use under a license, as well as to identify any registered security interests and ongoing or pending legal proceedings against them.
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