Incorporating a company (i.e. when you form a limited liability company) you actually create a legal entity that is a separate and distinct entity from that of the company directors, shareholders and other officers.
The creation of this entity is one of the best ways to protect a business owner from personal liability. Shareholders of a limited company are generally not liable for the debts of the company in the event of the company ceasing to trade. Creditors of a limited company may seek payment from the assets of the company, but not from the personal assets of the shareholders. This means that business owners may engage in business without risking their homes or other personal property.
Advantages of forming a limited company
The advantages of forming a limited company as opposed to Sole Trader are:
1. A limited company is a separate legal entity and thus distinct from its shareholders and directors, which means that both the directors and the company have completely separate rights and existence, hence limited liability.
2. Operating a business though a limited company also conveys status and engenders confidence in those financial institutions, suppliers and customers with whom the business may trade.
3. Enterprise funding when setting up a business, if and when approved, is generally paid over to a limited company structure.
4. The registration of a Limited Company name protects that specific limited company name from being registered by any other party on the company register. Registration should not, however be confused with implying that the company name so registered is "trademarked". The protection and registration of a "trademark" is a separate legal process.
5. The private and personal assets of the shareholders (i.e. the company owners) are protected from creditors in the event of litigation by them against the limited company, for example, the liability of the shareholders of a limited company is limited to the amount unpaid on any shares issued to them.
6. A shareholder (i.e. the owner) in a company cannot be held personally liable for the debts of a limited company. A sole trader on the other hand may become personally liable for all of the debts incurred in his/her business.
If you have any questions or queries on any of the above, do feel free to contact me.