- One of the most important decisions anyone setting up their own business will make is what structure to use – should they operate as a Sole Trader or as a Limited Company? (Partnership is a 3rd option, but is less common than the other 2).
- One of the main advantages of setting up a Limited Company is to do with the principle of Limited Liability.
- A Limited Company is treated as a separate legal entity, so that, whatever happens within the company will remain within the company.
- What this means in simple terms is that in the unfortunate situation where a business fails with unpaid creditors, the creditors can seek to recover debts against the assets of the company, BUT they cannot pursue the shareholders (owners) of the company for the recovery of these debts.
- An exception to this general scenario is where a bank has provided a loan to a company, and has sought personal guarantees from the shareholders. If the business fails in this scenario the bank is entitled to pursue the shareholders personally for the loan.
- This contrasts sharply with a Sole Trader business – in the same scenario ALL the personal assets of the Sole Trader are ‘fair game’.
- It is very important to note that the role of Company Director, which a business owner will hold if they set up their business as a Limited Company, comes with a level of responsibility which should not be taken lightly.
- In the scenario where a business fails, and it has been found that a Company Director has been engaged in ‘reckless trading’ or
- ‘fraudulent trading’ (as defined by Companies Act 2014), their personal assets can be pursued by unpaid creditors.
- The decision to set up your business as a Sole Trader or as a Limited Company is not one that should be taken lightly.
- It is not a ‘one-size-fits-all’/’black-or-white’ scenario; many factors need to be considered.
- For some business owners the Limited Liability protection provided by a Limited Company is of itself a good enough reason to choose that structure.
- Taking on the role of Company Director will attract responsibilities and obligations.
- A business owner can change structure at any time. A very common situation is to convert from Sole Trader to Limited Company after a couple of years in business.
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