Limited Companies are the vehicle of choice for most owner managed businesses. In our latest video we look at limited liability – it does what it says on the tin!
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The limited company is the startup vehicle of choice and the structure of most owned and managed businesses. But why is this the case? Aside from the tax financial and business structuring advantages, the main advantage of a limited liability company is that it does what it says on the tin. It limits liability. But whose liability does it limit and what is that liability limited to? Why do business owners want to limit their liability anyway?
Dealing with the obvious question first, unlimited personal liability is no joke. You could lose all of your savings, your house, your car, everything you’ve worked for. That’s why people want to limit their personal liability.
Let’s take a step back and think about it for a moment. Whose liability is being limited anyway? Well, the answer is it’s the shareholders, the business owners. As shareholders regardless of whether they’ve employed themselves through the business as directors, as well. What is the shareholders liability limited to? Well the answer is it’s the amount that they agreed to pay for their shares and that’s usually a very low amount maybe a couple of pounds.
While we’re talking about share capital, just remember big isn’t big when it comes to incorporating a company and its nominal share value. That’s because if a company fails, the unpaid share capital becomes a debt owed to the company by the shareholders and it’s a debt that insolvency officers and administrators collect from them.
For example, if you incorporate a company with the share capital of a million pounds but only paying a couple of hundred, you could be liable to pay in the rest if the company becomes insolvent. That said in owner managed businesses the shareholders and the directors are the same people. Theseowners can’t escape personal liability just by being shareholders if in fact they run the business unlawfully or improperly.
So what should shareholders directors do then to protect their limited liability? Well one obvious thing is to make sure that all communications they send on behalf of the company clearly come from the company and not from them in their personal capacities. At its very worst correspondence that appear have been sent personally could reattach liability to shareholders so owner-managers, shareholder, directors should think long and hard before they accidentally or deliberately give up the shelter of limited liability.
How could they voluntarily give up limited liability? Well that usually happens when they sign a personal guarantee or a similar document like a guarantee of a premises lease.
