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What Does Limited Liability Mean?

What does limited liability mean? Author: John A Waller, Consultant. Reviewed: July 23rd, 2024.

Limited Liability (LL)Definition

In the United Kingdom, Limited Liability defines the extent to which a company shareholder or director remains financially accountable for its debts.

When operating a business, benefiting from LL requires your business to incorporate as a private limited company registered at Companies House. The same applies to public limited companies (plc) and limited liability partnerships, both limited by shares held.

The word limited in this situation implies the amount of liability the shareholder holder has in an insolvency.

Then, when incorporated, your business legally stands as a separate entity. Therefore, the finances and assets remain separate from the owners as individuals. You are not personally liable for the company’s debts.

The capital of the company is the amount of fully paid shares, not unpaid shares. In the United States, a private limited company is more commonly referred to as a corporation (corp.). However, in the United States, a limited company incorporation differs from that of the United Kingdom, with different legal status.

Hence, if your company remains exposed to legal proceedings against it, the owners (Shareholders) remain immune and safe.

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Please contact our experts on live chat from 8 a.m. to 8 p.m. or telephone 0330 056 3120 to discuss your issues in private with an insolvency practitioner.

Please note, though, that If you are signing a contract for your company (remember, a company is a separate legal entity), ensure you sign no documents personally. When signing any document, sign it as “For and on behalf of ADV Ltd” and then Frank Jones, Managing Director, as an example. The Ltd company is the legal entity signing as per the contract, not you as an individual. Therefore, if the individual is an “individual”, they assume the liability for what was signed for and contracted.

Meaning?

So, separation remains between individuals and companies owned by them, and the reason for LL to the individual is other than the loss of initial share investment.

Ltd companies expose shareholders only to the investment shown as shares.

Company Directors are not personally responsible for company liabilities.

Any legal actions again apply to the company, not the directors, personally and financially.

The same applies to an LLP and its registered members.

Please note, though. LL implies that business owners are not responsible for anything in the Ltd company. However, this is not correct. “Limited liability” does not mean” no liability,” and company directors can be judged liable in some situations.

Advantages of a Limited Liability Company?

There is no personal liability for any company debts.

Choosing to trade as a limited company allows you to enjoy better tax advantages, reduce the company’s liabilities, and avoid personal liability from the company’s debts—not as with a sole trader or partnership.

To enjoy no liability for your company’s debts. You must ensure you act correctly as a director in compliance with the company law.

Efficient TaxWise.

A limited company has a separate tax account and takes different measures to manage its tax liability. It pays a 19% tax on its profits, which is lower than that of a sole trader.

Company Directors may pay themselves a salary, often at the minimum personal allowance. Subject to available profits and cash flow, they may pay themselves a dividend. (Providing they are shareholders in proportion to the percentage held.)

Planning for Succession.

LL companies remain separate legal entities from those who own them. Therefore, 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 be offered shares in the company share scheme as part of an incentive scheme. This will further help employees remain loyal 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 must be registered at the company’s house and name. Usually, company names become the brand names of the products the company manufactures or sells and have a perceived value.

Explain the agreement of an Ltd Company.

When setting up a LL Company. Articles of Association outline how company officers conduct themselves. Another document is entitled “Memorandum of Association”. Within this document, the intent to become a company shareholder remains noted. Further, a document headed by the LL Company Agreement outlines the agreement between shareholders.

Mapping out how the shareholders agree and how to deal when not in agreement. Unlike the Articles of Association, this agreement remains private and not registered at the company’s 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, they remain within the company and are not distributed as dividends.

A private company limited by guarantee remains a separate legal entity, the same as an LL company.

However, guarantors own the company, not shareholders. So, the guarantor’s liability remains limited to their initial input of funds.

Companies limited by guarantee legally require one director. Appointed directors are usually referred to as trustees.

Can an LL Company have a liability of any kind?

LL company requires that the company’s debts remain the company’s responsibility only unless a personal guarantee remains given.

Companies limited by guarantee have a guarantor who remains liable for the company’s debts up to an agreed amount, as noted in the company’s Memorandum of Association.

Directors and shareholders remain liable for a company’s debts only by the value of shares held, or liabilities apply when a court judges personal liability for fraud or wrongful trading.

Any creditors, banks, and other financial institutions often maintain company directors and give personal guarantees for loans arranged on behalf of the company, along with overdrafts and property leases. In the event of company failure, directors must repay private funds’ guarantees.

For further reading, please click on company debt advice and support.

Directors Personal Liability Exposure in a Ltd Company

LL accommodates security for company shareholders and directors. However, some situations arise when the directors can grow personally liable for the company’s debts.

  • 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 LL Company’s Debt Obligations?

Notwithstanding the protection of LL, debts within your limited company can still add stress to its day-to-day management.

Once your company starts to stutter while trading, incur losses, and impact cash flow, it can decline fast.

Company directors need to control the company’s financial position.

However, if the company becomes insolvent, care must be taken when dealing with its creditors, particularly attention to repayment. Not following care and advice can expose you to liability for company debts.

An Ltd company’s debt usually includes unpaid supplier invoices, wages not paid, and outstanding rent.

A common issue is a liability to HMRC. If not handled correctly, tax liability can personally affect the company directors.

The HMRC focuses on collecting taxes, particularly VAT.

It is essential to ensure you seek help for LL tax debts.

Bounce Back Loans and directors liability.

Many Bounce Loans have been issued due to the Coronavirus COVID-19 pandemic.

If bounce-back loans were taken out correctly, directors are not liable for their repayment. However, directors may be held responsible if they took loans for personal use or fraudulently.

So, if a company fails, bounce back loans and liquidation are unsecured creditors guaranteed by the United Kingdom Government.

For further reading, please click on closing a limited company.

Sole Traders and LL

LL does not apply to sole traders. A sole trader remains the business owner as an individual, not an incorporated company. Therefore, the owner is responsible for the liability of the business.

Limited Liability Partnerships and LL

Limited liability partnerships (LLP) provide a partnership formation in which an individual partner’s liabilities remain confined to the value of money and investment of the business partner. The title LL implies that the partnership’s creditors may not revert to the individual’s assets when a partnership folds.

FOR FURTHER READING ON PARTNERSHIPS, CLICK ON PARTNERSHIP ISSUES IN BUSINESS.

Unlimited Liability

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 legal formations. A sole proprietorship trades the business as the sole owner. Therefore, it does not operate as an entity separate from its owner. However, a sole proprietor works with personal liability for the financial responsibilities of their business.

A partnership is more than one individual and includes other individuals who share the operation of the business. It is not a corporate or separate legal entity. Therefore, the partnership remains liable for the business joint and severally commitments.

Ways HBG may help?

HBG Advisory can provide expert guidance and practical assistance to maintain you as a company director.

If you require assistance agreeing on the most beneficial way forward for your company, use the live chat between 9 a.m. and 8 p.m. or call us on 0330 056 3120.

To view members of The Team at HBG Advisory.

END

Bounce Back Loan advice for Company Directors

Directors should seek professional advice if they have Bounce Back Loan worries regarding repayments. The UK government introduced the COVID-19 support scheme to support businesses through the pandemic. owever, repaying the loans has been difficult. So ensure you seek advice sooner than later.
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