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Avoiding personal liability

The good news is that it is relatively easy to avoid personal liability in your business. 

Such can be achieved by ceasing to trade on your own account (i.e. as a sole trader) and instead, incorporating a limited liability company and trading out of the company. 

This is possible because as a matter of law, a company is a distinct legal creation that has a separate legal personality and thus it is the company (and not its owners - known as its shareholders) that are liable for the debts of the business.

It is for this reason that virtually all businesses of any size or complexity avoid the “sole trader” model and opt instead for trading out of a separate and distinct corporate structure such as a company or, perhaps, a partnership.  If the company does not have sufficient funds to meet its debts and other obligations, the company can be dissolved and the owners behind the company generally are not liable to meet any shortfall.  We say generally as, in some cases, the owners are asked to give separate personal guarantees which can be called upon if, for example, the company fails.

The law allows this because it is felt that the corporate structure encourages an entrepreneurial spirit which is generally good for society and thus it acknowledges that from time to time, some companies will succeed and others will fail but that it is more important to give entrepreneurs the key protection of limited liability to encourage them to try and set up a business and bring with it the benefits to society of employment, tax revenues and growth.

For more information about Olswang go to http://www.olswang.com/main.asp?sid=193

 

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