What Does Limited Liability Mean?
Limited Liability Definition
Limited liability defines the degree to which a company shareholder or director remains financially accountable for their company’s debts.
When operating a business, benefiting limited liability requires your business to incorporate as a private limited company, registered at Companies House. The same applies to a public company and a limited liability partnership.
Then, when incorporated, your business stands as a separate entity legally. Therefore, the finances and assets remain separate from the owners as individuals.
Hence, if your limited company remains exposed by saying legal proceedings against it, then the owners (Shareholders) remain immune and safe.
To request free advice?
Please contact our experts on live chat from 8 am to 8 pm, or telephone 0800 612 5448. to discuss in private your issues with an insolvency practitioner.
Please note though, If you are signing a contract for your limited company (Remember a company is a separate legal entity).,Ensure you sign no documents whatsoever personally. When signing any document, ensure you sign as “For and on behalf of ADV Limited then Frank Jones, Managing Director as an example. The limited company is the legal entity signing as per the contract and not you as an individual. Therefore, if the individual as an “individual”, they assume the liability for what was signed for and contracted.
So, separation remains between individuals and limited companies owned by them and remains the reason for LIMITED LIABILITY to the individual other than the loss of initial share investment.
Limited companies expose shareholders only to the investment shown as shares.
Company Directors are not liable for company liabilities personally.
Any legal actions again apply to the company and not directors personally financially.
The same applies to an LLP, and it’s registered members.
Please note, though. Limited liability implies business owners are not liable for anything that occurs in the limited company. However, this is not correct. “Limited liability” does not imply”no liability,” and limited company directors can be judged liable in some situations.
Advantages of a Limited Liability Company?
No liability personally for any debts of the company.
Choosing to trade as a limited company is to enjoy better tax advantages and ring-fence the companies liabilities and stay clear of personal liability from the company’s debts. Not as with a sole trader or partnership.
To enjoy no liability for your companies debts. You have to ensure you act correctly as a director in compliance with the company law.
A Limited company has a separate tax account and have different measures to deal with it’s a tax liability. A Limited company remains taxed on profits of the company at 19%. Lower than a sole trader.
Company Directors may pay themselves a salary often at the minimum personal allowance level. They then subject to profits being available along with cash flow may pay themselves a dividend. (Providing they are shareholders in proportion to the percentage held.)
Planning for Succession.
Limited liability companies remain separate legal entities from the people who own them. Therefore, if in the event of death or fallout. The company still exists independently, retains value and affords security for those employed.
Potential Employee buy-in
Pivotal employees may have the chance or offered shares in the company share scheme as part of a company incentive scheme. This will further help in employees’ overall loyalty to the company as it grows and may even be part of its succession plan.
Protecting company name and brand.
When setting up a company, a trading name is required and requires registering at companies’ houses and names. Usually, company names become the brand name of the products the company manufactures or sells and has a perceived value.
Explain the agreement of a Limited Liability Company?
When setting up a Limited Liability Company. Articles of Association lay out the rules of how the company officers conduct themselves. Another document exists entitled “Memorandum of Association”. Within this document, the intent to become a shareholder of the company remains noted. Further, a document headed Limited Liability Company Agreement outlines the agreement between shareholders.
Mapping out how the shareholders agree and how to deal when not in agreement. This agreement, unlike the Articles of Association, remains private and not registered at companies house.
Private Companies Limited by Guarantee?
Often set up for “not-for-profit” structures such as charities. Shareholders, in this case, do not require a profit for the shareholders. If any profits exist, then they remain within the company and not distributed as a dividend.
A private company limited by guarantee also remains a separate legal entity, the same as with a limited liability company.
However, guarantors own the company rather than shareholders. So guarantors liability remains to their amount of initial input of funds.
Companies limited by guarantee legally require one director as a minimum. Appointed directors usually are referred to as trustees.
Can a Limited Liability Company have a liability of any kind?
Limited liability company requires debts of the company remain the companies responsibility solely unless a personal guarantee remains given.
Companies limited by guarantee, have a guarantor who remains liable for debts of the company up to an agreed amount—noted in the companies Memorandum of Association.
Directors and shareholder remain liable for a company’s debts only by the value of shares held, or liabilities apply when a court which judges personal liability for fraud or wrongful trading.
Any creditors, banks and other financial institutions often maintain company directors give personal guarantees for loans arranged on behalf of the company along with overdrafts and property leases. In the event of company failure, though, directors will have to repay private funds’ guarantees.
For further reading, please click on company debt advice.
Directors Personal Liability Exposure in a Limited Company
Limited liability accommodates security for company shareholders and directors. However, some situations arise when the directors can grow personally liable for the debts of the company.
- personal guarantee;
- trading notwithstanding knowing the business is insolvent;
- sell assets lower than current market value;
- overpay themselves;
- funds raised in fraudulent ways.
What are Limited Liability Company Debt Obligations?
Notwithstanding the protection of limited liability. Debts within your limited company can still add stress to the day to day management of your company.
Once your company starts to stutter whilst trading, incurring losses and impacting cash-flow, your company can decline fast.
At this point, company directors need to control the companies financial position.
However, if the company becomes insolvent, care needs to be taken when dealing with creditors of the company particular attention, especially to repayment. No taking care and taking advice can expose you liable for company debts.
Debts of a limited company usually include a mix of supplier invoices unpaid, Wages not paid, and rent outstanding.
Also, a common issue is that of liability to HMRC. Tax liability can affect the directors of the company personally, if not handled correctly.
The HMRC takes a focussed view on collecting tax, particularly VAT.
It, therefore, essential to ensure you seek help for limited liability tax debts.
Bounce Back Loans and directors liability.
Many Bounce Loans have been issued due to the Coronavirus COVID19 Pandemic.
Providing bounce back loans were taken out correctly; then directors are not liable for their repayment. However, if directors took loans to say personal use or fraudulently, they may be held liable.
So if a company fails, then having bounce-back loans and liquidation, therefore, rank as an unsecured creditor guaranteed by the UK Government.
For further reading, please click on closing down a limited company.
Sole Traders and Limited Liability
Limited liability does not apply to sole traders. A sole trader remains the owner from the business as an individual and not as an incorporated company. Therefore, the liability of the business is that of the owner.
Limited Liability Partnerships and Limited Liability
Limited liability partnerships (LLP) provide a partnership formation where an individual partner’s liabilities remain limited to the value of money and the business partner’s investment. The title, Limited liability, implies that the partnership’s creditors may not revert to the individual’s personal assets when a partnership folds.
FOR FURTHER READING ON PARTNERSHIPS, CLICK ON PARTNERSHIP ISSUES IN BUSINESS?
Small business owner trade as
- Sole traders or sole proprietorships;
- a partnership.
Unlike limited companies or other formal entities. Sole traders and partnerships need no formal formations. Sole proprietorship, trade the business as the sole owner. Therefore not operating as an entity separate from its owner. However, a sole proprietor operates with personal liability for the financial responsibilities of their business.
A partnership is more than one individual and includes other individuals to share the operation of the business. A partnership remains not a corporate or separate legal entity. Therefore, the partnership remains liable for the commitments of the business joint and severally.
Ways HBG may help?
HBG Advisory can present you with the expert guidance and practical assistance to maintain you as a company director.
If you require assistance agreeing with the most beneficial way forward for your company, use the live chat from 9 am and 8 pm. or call us on 0800 612 5448.
To view members of The Team at HBG Advisory.
Support on Directors Redundancy Claim.