What Is Limited Liability?
Limited liability is a protection afforded to directors, partners, and shareholders of limited companies.
This limits the liability of the company’s members; they can only be made responsible up to the amount they’ve put into the company. For the most part, they cannot be made personally liable for company debts.
But what are the different kinds of limited liability?What are the rules surrounding it? And are there any cases where limited liability doesn’t apply?
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What Are the Different Kinds of Limited Companies?
Private Limited Companies (LTDs) – A private limited company doesn’t publicly trade shares and is often owned by its Directors.
Public Limited Companies (PLCs) – Public limited companies have the ability to trade their shares on the public stock market, although they don’t always have to list them for sale. They must have allotted share values of at least £50,000. £12,500 of these must be paid up.
Limited Liability Partnerships (LLPs) – A limited liability partnership must be comprised of at least 2 partners. The limit of the partners liabilities will be agreed upon by them, not by shares. They can’t sell shares or make a profit from them. The amount the partners place into the business is flexible and can be changed at any time.
Limited By Shares or Guarantees?
Companies can either have their liabilities limited by shares or by guarantees.
Most companies are limited by shares – this is where any debt liabilities are limited to the total amount of shares in the company. Directors, partners, or shareholders cannot be pursued further for the amount.
Some companies, however, are limited by guarantee. This is usually the case in not-for-profit organisations, such as charities or social enterprises. In these cases, the organisation’s debt liability is capped by a fixed-guarantee amount, listed in the Memorandum of Association. This is usually a nominal fee – it could be as little as £1.
Are There Any Exceptions to Limited Liability?
Personal Guarantees – Personal guarantees are the most common exception to limited liability. This is where lenders ask company directors to agree to personal liability for the borrowed amount in the event the company is unable to pay it. This can have serious consequences for directors if they’ve guaranteed large amounts, potentially resulting in personal bankruptcy.
Director Misconduct – In cases where directors have acted irresponsibly or deceitfully, thereby violating their fiduciary duty towards their creditors and the public, they can be punished with personal liability by the court. This can be applied to directors found liable for misfeasance or wrongful trading, or those who are found guilty of fraudulent trading.
Does Limited Liability Protect Me?
While limited liability measures do provide a very effective safety net for company members, it doesn’t function as a complete get-out-of-jail-free card.
If your company is insolvent, you should act promptly to make sure you’re protected. Our insolvency practitioners can help to guide you through the process of business closure, avoiding any potential pitfalls.
Contact us today to arrange a free, no-obligation consultation.
