Limited liability: what does this mean for you and your company?
When a company is incorporated at Companies House, it gains the advantage of limited liability. Here, we explain what limited liability means for you and your company and why it is such a significant benefit for many business owners.
When you register a limited company, your liability for business debts is restricted to your investment in the company. This is because, upon incorporation at Companies House, a limited company becomes a legal ‘person’ in its own right. As a result, the company’s liability, finances, and assets are entirely separate from those of the individuals who own and manage the business.
If your company becomes insolvent or faces legal action, you are only responsible for debts up to the nominal value of your shares or any personal guarantees. Once you have invested this amount in the company, you should not have any additional financial liability.
However, limited liability does not offer complete protection. If you are found guilty of negligence, wrongful or fraudulent trading, or commit any other criminal acts while performing your company-related duties, you can be held personally liable and may face prosecution.
Limited liability of company shareholders
Private companies limited by shares and public limited companies (PLCs) are owned by shareholders (members), each holding one or more shares.
When shareholders agree to take shares, they commit to paying the shares’ ‘nominal’ value to the company. While the nominal value of most company shares is £1, it can be any amount. Shareholders typically pay for their shares immediately, but some companies allow shares to be partly paid or unpaid for a specified or indefinite period.
The liability of shareholders is determined by the total nominal value of all their shares. Once they have paid for their shares, they should have no further financial liability to the company.
Limited liability of company guarantors
Private companies limited by guarantee are ‘owned’ by guarantors, who each agree to pay a fixed sum of money to the company if it becomes insolvent. The nominal value of a guarantor’s personal guarantee is typically £1, but it can be any amount.
Limited liability of company directors
Typically, directors do not have personal liability for the companies they manage unless:
- They are also members, and/or
- They provide personal guarantees to the company’s creditors, commercial landlords, or when entering into business contracts on behalf of the company.
However, there are situations where directors can be held personally liable by the courts or face legal action from lenders, suppliers, clients, employees, the public, government agencies such as Companies House and HMRC, the courts, and other individuals or businesses.
Exceptions to limited liability protection
Limited liability does not apply in all situations. It is not applicable if a director breaches their statutory duties as outlined in the Companies Act 2006. Limited liability protection can also be lost due to negligence or unlawful acts.
Situations that can lead to directors being personally liable for debts, compensation, and other legal claims include:
- Failing to file Confirmation Statements and company accounts
- Not keeping statutory company records or registers
- Failing to disclose conflicts of interest
- Misusing company funds
- Pre-incorporation contracts that a director entered into on behalf of a company before it was set up
- Breach of warranty of authority, such as binding a company to a contract without authorization, which could lead to the company seeking redress against the director
- Engaging in wrongful trading while a company is insolvent, such as:
- Paying dividends to shareholders
- Continuing to trade with no intention of repaying debts to creditors
- Attempting to repay company debts through fraudulent means
- Disposing of business assets below their market value
- Choosing to repay only certain creditors
- Willfully ignoring court orders issued to the company
- Breaching data protection, either knowingly or through negligence
- Failing to comply with the Companies (Trading Disclosures) Regulations 2008
- Engaging in price-fixing and competition offences
- Acting in the capacity of a company director when disqualified from doing so, or knowingly acting on the instructions of a disqualified director
- Making negligent or fraudulent misrepresentations while negotiating a contract on behalf of the company
- Attempting to deceive shareholders and/or creditors by making false statements about the company’s affairs
- Committing bribery offences under the Bribery Act 2010
- Committing health and safety offences
- Manslaughter by gross negligence
- Committing discrimination and harassment offences
- Committing environmental offences, knowingly or through negligence, during the company’s activities
- Paying employees less than the statutory minimum wage or making illegal deductions from their wages
You can avoid most of these liability situations. However, even the most vigilant and conscientious individuals can find themselves in challenging situations simply because they are company directors. This is why it is crucial to have insurance to protect both your company and yourself against third-party claims and other legal issues.
The most popular types of business insurance for limited companies and directors include:
- Public Liability insurance
- Employers’ Liability insurance
- Professional indemnity insurance
- Directors’ & Officers’ Liability insurance
Company directors carry significant responsibilities. It is crucial that they approach the role seriously, give careful consideration to all company-related decisions, and ensure adequate insurance policies are in place. By doing so, directors can protect the interests of the company and its members while minimizing the risk of personal liability.
Do sole traders have limited liability?
The liability of sole traders differs significantly because the law considers the individual and the business as one entity. This means there is no legal distinction between the business’s finances, assets, and liability and those of the individual. Consequently, sole traders have unlimited liability for business debts and legal claims. This is one of the primary reasons why many business owners in the UK prefer to set up a limited company.
Do you have any other questions?
So, as a summary, limited liability means that business owners are only responsible for the company’s debts up to the amount they invested. This protection keeps personal assets separate from business liabilities, providing a safety net for shareholders or guarantors. However, it doesn’t shield against liabilities arising from misconduct, fraud, or negligence.
For a deeper understanding of limited liability, check out the Startxpress Help Center and Blog. If you need further help, contact us at support@startxpress.io!
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