It is a common concern that if your company begins to fail, you could be affected personally with debt. If you were held personally liable for business debts as a sole trader, your own personal finances would be affected. Registering as a limited company can therefore give you added protection should things go wrong.
What is Personal Liability?
Broadly speaking, a liability is a company’s legal financial debts/obligations that arise during business operations. Therefore, personal liability affects a business owner: you are held personally responsible for your business’s debts.
Sole Trader vs. Limited Company
As a partner or sole trader, you are personally liable for your business's debts, meaning your personal property can be taken to satisfy debts incurred in your business trading. However, if you register as a limited company, you are not personally responsible for the debt as the directors' salaries immediately become their personal property and cannot be claimed by the company's creditors; the debt is therefore with the company.
Benefits of Forming a Limited Company
Besides limiting your liability for business debts, here are some other benefits to becoming a limited company:
- You are likely to pay less tax than a sole trader.
- A limited company can fund its employees’ executive pensions as a legitimate business expense.
- Succession - If a shareholder wishes to retire, sell his shareholding, or dies, it is far easier to transfer ownership of a limited company than a non-registered business structure.
- You will legally own your business name.
- It will be easier to get investment - as a limited company, you can sell shares to investors. As a sole trader, however, you can only really seek investment if you turn your business into a partnership.
If you would like more information about personal liability or you are interested in setting up a limited company, have a look at our company formation packages or call 0800 0198 698 to speak to our professional team.