Company formation is the process of incorporating (registering) a business as a limited company. When this happens, the business becomes a distinct legal entity; an individual ‘person’ in the eyes of the law. Essentially, this means that the company is completely separate from its owners in terms of finances, liabilities, contractual agreements, and ownership of property and assets. 
The law does not view unincorporated businesses like sole traders as distinct legal entities. When you operate as a sole trader, there is no separation between the business and the owner in terms of finances, assets, and liability.

Why would I register a limited company?

Generally, the main reason to register a limited company is to limit the financial responsibility of the people who own the business. This protection is known as ‘limited liability’. Private companies can be either limited by shares or limited by guarantee.

The owners of a company limited by shares are only liable for the value of their shares. The owners of a company limited by guarantee are only liable only for the value of their guarantees. Their personal finances and assets are protected beyond the limit of their liabilities.

This is not the case for unincorporated business structures. Sole traders, for example, have unlimited liability. This means that they are wholly liable for all business debts and claims because there is no legal or financial distinction between the individual person and their business.