The limited liability of a limited company
By PaperRocket Accounting, Nov 29 2018 10:26AM
If you’ve made the decision to start working for yourself, you may be wondering whether to go down the sole trader or limited company route. In last week’s blog, we looked at the pros and cons of both routes. This week, we take a closer look at one of the major advantages of working through a limited company- the limited liability it provides.
What limited liability actually means
In short, simply that the liability of the company’s directors and shareholders is limited. A limited company is legally deemed to be a separate entity to its members, which allows the owner to keep their own assets and finances separate from the business itself. It means that the shareholders of the company are only responsible for any company debts up to what they have invested. In turn, this means that if the company runs into financial difficulties, its members are not liable and therefore do not face having their personal assets seized.
Whereas, sole traders are not seen as a separate entity in law, meaning that they are subject to unlimited liability. This means that if the business gets into debt, then the owner is liable and may mean that any personal assets (savings, property etc) could be at risk.
As with anything in life, there are of course exceptions to this rule- times that this limited liability can be negated.
It is always important that directors make it clear that they are acting on behalf of and in the name of the company, otherwise they could become directly liable if it reasonably assumed that they were acting on behalf of themselves. Some banks/creditors may also ask for the director to give a personal guarantee of any money lent.
Another instance when liability may be imposed by a court on the director/shareholder, is when they have been found guilty of wrongful or fraudulent trading. Because the UK is one of the easiest places in the world to set up a limited company, sometimes this can be abused by those who want to set up a business specifically with the intention of running up debts and not paying them. In this case, they may be found guilty of fraud and the limited liability negated.
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