Tax Tip For Entrepreneurs — 3. Take Advantage Of The Veil Of Incorporation
Sole traders have unlimited liability for any debts that their business incurs. By contrast, a shareholder is only liable for company debts up to the amount of any share capital that they own. Limited liability is one of the main advantages of choosing to run your business as a limited company rather than as a sole trader or partnership.
A limited company is a separate legal entity from its shareholders and directors. This is known as the veil of incorporation. The shareholders’ and directors’ personal assets are not available to meet the debts of the company. However, the money and assets of the company belong to the company rather than to the shareholders personally.
By contrast, where an individual operates a business as a sole trader, there is no legal distinction between his or her business and private affairs. This means that the individual is personally liable for any business debts.
Take Advantage Of The Veil Of Incorporation Jack has set up in business as a limited company. He has 100 £1 shares that are fully paid up. He is the sole shareholder. The business collapses with debts of £10,000. Jack is not personally liable for those debts. His liability is limited to his shareholding of £100.