Incorporated and unincorporated businesses

An incorporated business has a separate legal personality from that of its owners and managers. This means its owners and managers are not liable for business debts.

Unincorporated businesses, by contrast, are run by individuals who have not set up a separate legal entity and who thus retain full personal liability for the debts of their business.

A ‘sole trader’ is an unincorporated business run by an individual as a self-employed person. The owner remains liable for all of the debts of the business.

A ‘partnership’ is formed when ‘two or more people are carrying on a business in common with a view of profit’. This is also unincorporated, and the partners are personally liable for the debts of the partnership. Their personal assets can be at risk if they have insufficient funds in the business to pay creditors.

In a ‘limited partnership’, the partners’ liability can be limited to the amount they initially invested in the business. This is on condition that they do not control or manage the business or have the power to take binding decisions its behalf, and they must not remove their contribution for as long as the partnership is in business. If they breach these conditions, they can lose the protection of limited liability.