Limited liability refers to the legal protection that separates a company from its owners. In the UK, this means limited companies, LLPs, public limited companies (PLCs) and limited partnerships.
To be protected by limited liability means:
Shareholders are only liable for debts up to the value of their shares.
Directors aren’t personally liable for company debts (unless they’re also shareholders).
Legal actions are against the company, not individuals.
Unlimited liability means business owners are personally responsible for all of their company’s debts, even if those debts exceed the value of the business’s assets. It applies to sole traders and traditional partnerships.
Key aspects:
Owners are personally liable for all business debts, without limit.
Personal assets can be seized to pay business debts.
There’s no legal separation between the business and its owners.
This structure carries higher personal financial risk but allows for simpler business operations.
Limited By Shares Vs Limited By Guarantee
These are two distinct types of limited liability companies in the UK, each with its own structure and typical uses. The key difference lies in ownership structure, profit distribution, and the nature of financial commitment from owners or members.
Limited by Shares: This is the most common form for profit-making businesses, exemplified by the private limited company (Ltd). The company is owned by shareholders who purchase shares, representing their stake in the business. Shareholders’ financial liability is limited to the amount they’ve invested or agreed to invest in the company. If the company fails, they may lose their investment but aren’t responsible for additional debts.
Limited by Guarantee: This structure is often used for non-profit organisations, charities, or social enterprises. Instead of shareholders, it has members who act as guarantors. These members agree to pay a nominal amount (usually £1) towards company debts if the organisation is wound up. This structure doesn’t have shares or pay dividends, making it suitable for organisations focused on reinvesting profits into their mission.
Advantages and Disadvantages of Limited Liability Companies
Advantages
Limited liability protection for owners
Separate legal entity status
Potential tax benefits
Easier to raise capital through share issuance
Enhanced credibility with customers and suppliers
Perpetual existence independent of owners
Disadvantages
More complex and costly to set up than sole proprietorships
Increased regulatory requirements and paperwork
Less privacy due to public filing requirements
Potential double taxation on dividends
Stricter accounting and record-keeping obligations
Possible restrictions on company actions due to shareholder rights
What is the Liability of a Limited Liability Company in Insolvency?
The only way a director or shareholder can become liable for company debts over the value of their original shareholding holding or guarantee is where personal liability is imposed by the court. This can be the case in instances of wrongful or fraudulent trading.
Courts can impose personal liability in the following situations:
Personal Guarantees on business loans
Wrongful Trading (continuing to trade when insolvency is unavoidable)
Fraudulent activities
Selling company assets below market value
Making false statements about company finances
Distributing unlawful dividends
Overdrawn Director’s Loan Accounts
Serious Health and Safety breaches
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 info@companydebt.com.
