What is a company?
The sole trader
People can choose from several different structures for running their business. The most common are a sole trader, a partnership and a company.
Typically, a sole trader is a smaller business, like a shop or a market stall. The sole trader is personally liable for debts she or he incurs.
There is no legal separation between the person and the business.
A partnership is where two or more people contribute their own resources- cash, or property, or even their time. They then have an agreement about how they share the profits between them. A partnership is usually used by professionals, like accountants and lawyers.
Around the world, the most popular business structure is a company. A company is a separate legal entity from the owners, who are called shareholders. The significance of this separation is that in most cases, shareholders cannot be personally liable for the debts of the company. If the company fails, generally the only liability of the shareholder is the amount they have invested in the company to purchase their shares. This type of liability is called ‘limited liability’. This is why a company name always has ‘limited’ or ‘ltd’ at the end of it’s name.
Another way to look at the separation is to see the company as a separate ‘person’ from its directors (who are responsible for running the company) and its shareholders. A company can do many of the same things as a person- such as own property, enter contracts, sue, and be sued. There is no separate legal ‘person’ for sole traders and partnerships.
Note | This information is intended as a guide only – it is not intended as legal advice. For more detailed information please refer to the legislation or seek legal advice.