Filing suit in court is something that most people and businesses only do as a last resort, as it usually involves spending time and money that could be better applied in some other manner. All the same, lawsuits are part and parcel of our highly litigious society—and when it comes time to actually sue, you (or your lawyer, to be precise) had better have a clear understanding of the differences between suing different legal persons: individuals or sole traders, limited companies, partnerships, and so on. Let’s take a look at how legal liabilities play out in these contexts, then, so that our readers might have a better understanding of what to expect as they enter into legal disputes.
Sole traders & individuals: Individual persons and sole traders have the same legal liabilities, as a sole trader is nothing more than an individual that has a business that they are entirely (and solely) responsible for—a genuine one-man-act. Sole traders personally bear the full weight of the financial and legal obligations of their business; so if, for example, a debt is accrued then that person will have to pay for it in whatever way they can, whether from their business accounts or from their personal accounts (or assets). While there are tax advantages to operating as a sole trader, many people tend to avoid this type of business structure because of the vulnerability it entails if and when a lawsuit is eventually filed against them.
Partnerships: These are much the same as sole traders from the legal liability perspective, with the only difference being that there isn’t just one person involved. Partnerships are businesses of two or more persons where business liabilities are, as in the case of sole traders, entirely transferrable to the individual shareholders. An interesting legal point to bear in mind here—for the people suing equally as much as for the people being sued—is that though partnership members may not share in company profits equally (an issue determined by their operating agreement), they all have equal responsibility for meeting the company’s debts. This liability is a full 100% for all members of the partnership, which is highly favorable to the party filing the suit in court.
Limited companies: These businesses are known by this name because the personal liability of the shareholders (usually the owners and managers of the company) is limited. Unlike with the examples above, when dealing with a limited company (also known as a limited liability company) the party suing will rarely, if ever, be able to make claims to anything but the company’s funds, assets, etc. Though creating this type of business is more cumbersome as more paperwork is needed—and company operations records are in the public domain, another major difference—it is nonetheless a highly popular business structure to choose due to this legal shield.
It should be noted, that recently a new business structure has been created: the limited partnership. The limited partnership structure allows for a legal shield against personal liability, but retains the internal organization perks of a normal partnership.
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