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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.

The exceptions

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.

PaperRocket Accounting provide accounting and tax services to professional contractors and freelancers working in the UK.

We offer our clients a flexible choice of fixed fee monthly packages which cover all of their accounting and tax needs (so no hidden costs or surprise bills!). All of our accounting packages include a monthly subscription for a cloud accounting software subscription provided by the awarding winning FreeAgent.

Each of our clients is given their own dedicated qualified accountant with unlimited access in person, telephone, or by email.

We pride ourselves on our client satisfaction and customer service and were shortlisted as 'Welwyn Hatfield Business of the Year 2018' in the SME Hertfordshire awards, 'Small Practice of the Year 2016' in the AccountingWEB practice excellence awards, as well as FSB Hertfordshire Service Excellence finalists in 2015 and 2016.

To find out how we can help you please get in touch now.

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