Limited liability is the legal concept whereby a limited company is separate legally from it’s shareholder owners. The shareholders liability is limited to their investment in buying shares in the company and shareholders are not, subject to exceptions (see below) liable for the company’s debts..
There can be situations where directors and/or shareholders can incur liabilities relating to a company they are invested in and/or are directors of. The most common way, which often applies with small businesses, is where directors or shareholders have personally guaranteed borrowings by the company.
The other main way small business directors can become liable in relation to a limited company is where they have acted unlawfully in the lead up to company insolvency. This may be as a result of trading while insolvent, selling or transferring company assets at an undervalue or some other form of misfeasance.
If you are a director or shareholder and are worried about possible personal liabilities we can help. Please do get in contact with us.
What Does Limited Liability Mean?
The clear separation between individuals and their companies is a pivotal aspect of corporate law.
If a company is sued, it is the company which is being sued, not the individuals involved.
The same rules apply for members of LLP’s (Limited Liability Partnerships) or Limited Partnerships.
What are the Advantages of a Limited Liability Company?
There are a number of compelling advantages associated with a limited liability company. That includes:
No personal liability for company debts
One of the primary reasons the owners choose to incorporate their business is to avoid personal liability for company debts.
This allows the directors to trade without putting their personal property, cash and other assets at risk. As long as they adhere to their duties and responsibilities as directors then in the case of insolvency, the creditors will only be able to recover money from the company.
Limited companies are taxed on their profit at the current rate of 19 percent. They are not subject to the personal tax rates placed on sole traders and partnerships (unlimited companies) which can be as high as 45 percent.
Directors of limited companies can pay themselves a salary at the personal allowance level and take the rest of their pay as dividends, which are taxed at a lower rate. This will reduce the tax burden and keep more money in their pocket.
As a limited liability company is deemed to be a separate legal entity from its owners, the company will continue to exist beyond the life of its members. That means, if directors or members retire or experience ill-health, the company will continue to exist and operate. This can provide security for employees and other company members.
Another benefit of a limited liability company is the ability for key employees to be granted shares via a company share scheme. This can boost employee motivation and provide a monetary reward beyond a mere salary. Having a vested interest in the company’s success can also improve employee loyalty.
Protection of the company name
As part of the process of registering a limited liability company, a company name must be chosen. Company names can become valuable assets. Registering a name at Companies House prevents other businesses from using the same name. However, Companies House will accept the registration of a name which is very similar, so it may be worth registering alternative spellings or versions of the same name and keeping those as dormant companies.
What is a Private Company Limited by Guarantee?
Companies limited by guarantee are usually not-for-profit organisations like charities, sports clubs, societies and community projects. They are not set up to make a profit for the shareholders. Instead, any money they make is retained within the organisation or used for some other purpose.
A private company limited by guarantee is a separate legal entity that’s responsible for its own income, assets, debts and liabilities, just like any other limited liability company.
However, instead of issuing shares, the company is owned by guarantors. Their personal liability for the debts of the organisation is limited to a fixed amount of money called a guarantee. This guarantee is written into the company’s Memorandum of Association and requires the guarantors to pay the company’s debts up to a fixed sum, which is usually £1.
A company limited by guarantee must have at least one director, although most have several. The directors may also be given some other name like trustees, governors, the board of managers or the management committee. Whatever their title, they are responsible for the day-to-day running of the organisation.
Directors Personal Liability in a Limited Company
Although limited liability provides a great deal of protection for company shareholders and directors, there are some circumstances when they can become personally liable for business debts. That includes:
- If they sign a personal guarantee;
- If they continue to trade in the interest of shareholders (instead of the creditors) despite knowing the business is insolvent;
- If they dispose of assets at less than market value;
- If they overpay themselves from the company’s account creating an overdrawn director’s loan;
- If funds are raised to repay creditors via fraudulent means.
What are Limited Liability Company Debt Obligations?
Despite the protection of limited liability, company debts can still be very stressful and worrying for the directors. Not only is their livelihood at risk, but they also have to be aware of their changing obligations.
Once cash-flow is compromised, a business can decline very quickly. Directors then have to monitor their financial position very carefully. If the business becomes insolvent (you can check using this free insolvency test) then they must prioritise the creditors’ interests. Failure to do so could lead to personal liability for a proportion of the company’s debts further down the line.
Company debts can include unpaid supplier invoices, unpaid rent and even wages owing to employees. However, one of the most worrying debts of limited liability companies are those owing to HMRC. VAT, PAYE and corporation tax debts are a common issue for company directors. HMRC has its own range of powers to pursue arrears aggressively which can make this situation incredibly stressful.
Obtaining help and support to deal with limited liability company debts, and specifically tax debt, is essential. Being proactive about controlling cash-flow and putting a firm plan in place is an important first step, as is identifying areas of the business where money is being wasted.
Company debt experts can help struggling directors to explore debt refinancing and consolidation options which could provide the working capital required to repay creditors and drive the business forward.
How can we help?
As a UK leader in limited liability company rescue, recovery or closure, we can provide you with the expert advice and practical assistance to support you as a director. Please call us on 0800 074 6757, or email email@example.com.