Sole traders are very common in Bermuda: many of us operate our businesses in this manner, as it is the simplest way to enter the business world.

Whether we work on our own, or have staff, we trade with the public and enter into contracts to perform services for payment. Sounds easy – be your own boss, focus on the specific work you want to and have your own hours. The benefits are many, so are the downsides, but when it comes down to it, you, as the person taking on the work run the risk of getting into contractual disputes with the consumer.

Not only that, you may be sued for anything and everything that may or may not be 'your' fault. Ensuring that you have a contract that lays out the specifics will greatly reduce many of the dangers, but not all of them.

The biggest issue is liability for such things as injuries to employees, or damage to a customer's house or vehicle. In such cases, the employee or customer may look to the sole trader for compensation, and all the assets of the sole trader become 'fair game' in such circumstances. The sole trader could be forced to sell his own personal possessions and face bankruptcy where the business assets are not valuable enough to meet the claims.

That is why sophisticated sole traders take the commercial step of setting up a company to protect against personal assets being 'fair game' when disputes arise with their business. This concept is known as 'limited liability' because in the eyes of the law, a company has a separate legal identity. The majority of local companies formed are legally known as companies limited by shares – meaning that as a general rule, the shareholders (owners) are not responsible for the company's debts, including liability arising due to the company being sued.

Setting up a local company in Bermuda is a fairly straightforward affair, made much simpler by hiring a local law firm to assist in the incorporation process, which can take as little as a few days to complete. All it takes is the reservation of the proposed name and an application to the Bermuda Monetary Authority seeking approval for the business of the intended company and the beneficial ownership structure: from the direct shareholders all the way to the ultimate owners. If the company structure is approved, the sole trader who would have been personally liable for all debts incurred by his business becomes the sole shareholder of the company. It carries on the same business that was being carried on by the sole trader and employs the sole trader as an employee of the company. There are costs associated with incorporating a company and paying its annual expenses – and the process is more complicated than simply acting as a sole trader. But many sole traders have decided that the benefits of incorporation, particularly protecting the personal assets of the shareholder from consumers and creditors, outweigh the costs. The choice of whether to incorporate must be made based on commercial reasoning, taking into consideration all the pros and cons mentioned here and all those uncovered by careful research and under advisement of an accountant and a lawyer.

Adrian Beasley is an attorney on the Insurance Team within the Corporate/Commercial Practice Group at Appleby. A copy of Mr. Beasley's column can be found on the Appleby website at www.applebyglobal.com. This column should not be used as a substitute for professional legal advice. Before proceeding with any matters described herein, persons are advised to consult with a lawyer.