How limited is the liability of a limited company?

If you are new to the world of being your own boss, you may be undecided about whether to work as a sole trader or through your own limited company. And whilst there are indeed pros and cons to both, one of the major pros of a limited company is the limited liability that it brings with it for you.

What limited liability means

Just that! The liability of the company’s directors and shareholders is limited.

In law, sole traders are not seen as a separate entity to their business, which in turn means 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.

However, 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.

But wait…

As ever, there are of course exceptions to this rule, meaning that sometimes the limited liability can be negated.

For example, if the director or shareholder is found guilty of wrongful or fraudulent trading, then the court may decide that the limited liability does not apply. The UK is one of the easiest places in the world to set up
a limited company, so 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.

It is also 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.

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

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