Business Structures and Limited Liability

Posted by Luke Mitchell on 07 March 2018
Business Structures and Limited Liability

Perhaps the biggest challenge faced by all business owners is striking the right balance between devoting enough of their time to running a profitable business and ensuring they are properly maintaining the various relationships in their personal lives.

The line between business and personal lives can become particularly blurred where a business owner is operating their business in their own personal name. Given personal liability is unlimited, business owners who operate a business in their own personal name are significantly exposed - so much so that they potentially risk financial ruin - in the event that their business cannot meet its financial obligations.

The situation can be even more dire for those who operate a business in partnership with others in their own personal names. The members of a partnership are jointly and severally liable for all liabilities incurred by the partnership. Accordingly, a member of a partnership can face unlimited personal liability in respect of debts incurred by their business partners.

There is however a straightforward step that business owners can take to detangle their personal and business liabilities - incorporation.

A company is its own separate legal entity. Whereas individuals who operate their business in their own personal name are one and the same so far as their personal and business liabilities go, the directors and shareholders of a company are separate at law to the company itself.

This leads us to the major benefit of a corporate structure – separate and limited liability. Apart from a few exceptions (such as some tax liabilities, debts arising as a result of the directors of the company either engaging in certain conduct themselves or causing the company to engage in such conduct, or where an individual has personally guaranteed a company's debts), the directors and shareholders of a company cannot be held personally liable for the company's debts.

So while, in the event that the company fails, a company's shareholders may lose the funds that they have paid to the company in order to acquire their shares, they generally will have no liability in respect of the company's debts beyond those funds invested.

From an asset protection perspective, a company structure is usually the best option for a business. Incorporation is a quick, easy and cheap process that can save the proprietors of a business from significant personal hardship in the event that the business fails.

We place great value on our role as trusted advisers to our business clients and specialise in providing clarity and confidence to business operators. Contact us today to discuss the best structure for your business to ensure that your personal wealth is adequately protected

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