By Karina Job 

You should consider setting up a company to avoid the situation a client once found himself in. This particular client enjoyed all aspects of tourism and travel and so decided to establish a travel agency and operate as a sole trader. As with many new businesses starting up, the client incurred significant establishment costs.

Had the client set up a company to operate the business, he may not have had to have seen his retirement savings dwindle so very quickly, as he may not have been personally liable for the trading debts.

What is a company?

A company comes into existence after it is incorporated under the Companies Act 1993. Once the company is incorporated it is known at law to be a "Body Corporate". This means that the company is treated as being a separate legal "person" from its directors and shareholders. It can then enter into transactions as if it were a natural person. For example, it can sign a contract and be bound by that contract or it can sue people and be sued.

A company must have the following basic elements:

• 1.   a name which has been reserved by the Registrar of Companies
• 2.     at least one share, one shareholder and one director
• 3.  an address for the company's registered office and an address for service

Why form a company?

The main benefit of incorporation of a company is that it limits the liability of the shareholders, or the owners of the company. Most companies are limited liability companies. This means that the liability of the shareholders is limited. In the event that the company cannot pay its debts, and a liquidator is appointed, then the shareholders of a limited liability company are not liable to the liquidator for the company's debts, they are only liable for any amounts left unpaid on their shares. If, prior to the company going into liquidation the shareholders have fully paid for their shares, then they will not be liable to any of the company's creditors.

On the other hand, a sole trader or a person trading in partnership will become personally liable for the trade debts.

However, there are a couple of important things to note; firstly, if a shareholder has personally guaranteed any of the company's debts, then that person could be liable to a creditor, not in their capacity as a shareholder but in their personal capacity. This means that the company's creditors could look to that persons personal assets to recover money owing by the company.

Also, it is the liability of the shareholders of a limited liability company that is limited. The company continues to be liable for all the obligations it acquires.

If you are thinking about setting up a company and would like assistance, contact your lawyer today.