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What Does Limited Liability Mean?

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 ltd company registered at Companies House. The same applies to a public limited companies (plc) and a limited liability partnership 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 stands as a separate entity legally. Therefore, the finances and assets remain separate from the owners as individuals.You the remain not personally liable for the debts of the company.

The capital of the company is the amount of fully paid shares and 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 to that of the United Kingdom with different legal status.

Hence, if your 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 0330 056 3120. to discuss in private your issues with an insolvency practitioner.

Please note, though, 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, ensure you sign as “For and on behalf of ADV Ltd”, then Frank Jones, Managing Director, as an example. The ltd company is the legal entity signing as per the contract, and not you as an individual. Therefore, if the individual is an “individual”, they assume the liability for what was signed for and contracted.


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

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

Company Directors are not responsible for company liabilities personally.

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 imply” no liability,”and 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 lltd company is to enjoy better tax advantages, reduce the company’s 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 company’s debts. You must ensure you act correctly as a director in compliance with the company law.

Efficient TaxWise.

A ltd company has a separate tax account and has different measures to deal with its tax liability. A ltd company pays 19% tax on the company’s profits. Lower than a sole trader.

Company Directors may pay themselves a salary, often at the minimum personal allowance level. They then, subject to available profits and cash flow, 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 a company incentive scheme. This will further help employees 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 registration 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 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 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 a LL company.

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

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

Can a 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 debts of the company up to an agreed amount—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 will have to repay private funds’ guarantees.

For further reading, please click on company debt advice.

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 Debt Obligations?

Notwithstanding the protection of LL. Debts within your ltd 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.

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

However, if the company becomes insolvent, care needs to be taken when dealing with the company’s creditors, particularly attention, especially with repayment. Not taking care and advice can expose you to liability for company debts.

Debts of a ltd company usually include unpaid supplier invoices, wages not paid, and outstanding rent.

A common issue is a liability to HMRC. Tax liability can personally affect the company directors if not handled correctly.

The HMRC takes a focussed view on collecting tax, 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 rank as an unsecured creditor guaranteed by the United Kingdom Government.

For further reading, please click on closing down 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 where an individual partner’s liabilities remain confined to the value of money and nvestment 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.


Unlimited Liability

Small business owner trade as

  • Sole traders or sole proprietorships;
  • a partnership.

Unlike ltd companies or other formal entities. Sole traders and partnerships need no legal formations. Sole proprietorship, trade the business as the sole owner. Therefore, not operating 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 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 provide 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 0330 056 3120.

To view members of The Team at HBG Advisory.

Support on Directors Redundancy Claim.


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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