We often get asked by people setting up a new business, “What’s the difference between a sole trader and a limited liability company?
A sole trader is a common ownership structure used to operate a small business. The main operator of the business may be one person, perhaps supported by a family member such as a spouse. The extent of the sole trader’s liability is that they are personally liable for any business debt including bank loans and are also responsible for all taxes due as well as any losses the company may incur.
As such, a claim can be made by a creditor against the personal assets of the sole trader, which may include personal funds in bank accounts and the family home.
A limited liability company is a separate legal entity from the owners of the company who are the shareholders. Liability of the company is limited to the amount of the debt or obligations of the company and does not extend to a personal liability. However, in most cases where companies borrow or incur liabilities, the creditor will require personal guarantees from the directors and/or shareholders so they become personally liable for the company debt. Also, a director who has acted “recklessly” will become personally liable for transactions the company enters into.
It is important when entering into business to receive proper legal advice regarding the type of ownership structure that should be put in place. If you’re setting up a new business and want some expert advice, we’re happy to help!