Being liable as a sole proprietorship VS director at a corporation

There is no company structure that is going to guarantee that your personal assets will be 100% safe in the event you are sued. Otherwise that would lead to unscrupulous people taking advantage of it to harm good citizens such as ourselves. You can't protect yourself 100%, but that shouldn't be a reason for you not to "get in the game". As a business and an entrepreneur you will face many risks, but if you take the necessary steps to run your business in an honest manner, this should be the least of your worries.

However, if you are worried about your personal assets, then I would suggest you incorporate your business instead of going as a sole-proprietor. In terms of personal liability, being a sole-proprietor is not the same as owning a corporation. And structuring your business as a corporation will provide you much more protection than being a sole-prop. A corporation separates your business assets from your personal assets, and thus makes it much harder to go after your personal assets in the event your business is sued.

As Anonymous pointed out, there are actions that may "pierce the corporate veil". Some of these actions may not even be tied to the actual incident associated with the lawsuit. For example, if you own a corporation, but mingle your business funds with your personal funds, your corporate veil may be pierced, and you may open yourself up to personal liability. Another thing that may lead to you being personally liable is if it can be shown that you acted in an intentionally malicious manner.

The example you site of failing to complete a contract, would not result in personal liability in most situations.

The legal system is a big mess, and laws will vary from one jurisdiction to the next, so if you are concerned about this the best thing you can do is consult an attorney in your area. But I would say that under normal circumstances, if you take the necessary precautions, the odds of you being personally liable for a business action are fairly low.

Good luck!

Yes, you should form a corporation if you would like to limit your personal liability for the acts of the company (even if the company is just you).

If you form a company, and the company enters into a contract with a third party, then, generally, the company is liable in any disagreement relating to the contract and you will not be personally liable. I say "generally" because there are exceptions in which you can "pierce the corporate veil" to make the people running the company personally liable. When you can pierce is far too complicated for discussion here, but if you are running a reputable company then you will probably be ok.

In sum, you are much safer in forming a corporation than not.

PS. I am familiar with US law but suspect Canada is similar.

Get General Liability Insurance if you incorporate.

As others mention, your corporation might protect your personal assets, yet liability insurance helps cover legal and other expenses regardless of the outcome. Liability insurance for at least $2 million is not too expensive (certainly far less expensive than legal fees) and your corporation can claim the cost of the premium as a business expense.