What does Limited Liability mean?
Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.
When setting up your new business, it’s important to decide on the right structure for your company. Your choice of corporate structure will play a substantial part in determining your company’s liability. For instance, sole traders have unlimited liability. This means that they alone are responsible for ensuring that the business is compliant with tax laws and other relevant legislation. They are also liable for any damages incurred by their work, operations or products. There is no differentiation between the individual and the business, so the sole trader is liable in financial and legal terms to the company that they have created.
However, there are business structures that enable business owners to share or limit their liability. While this often comes at the expense of asset ownership or profit retention, it can reduce the risk of any individual shouldering legal or financial responsibility for their company.
Individuals’ assets are protected and if the company should fail, their personal loss will be limited to the face value of their share of the company. Furthermore, limited liability means setting up a company that is taxed at a corporation tax rate which is lower than the income tax rate.
Examples of limited liability
Many SMEs benefit from being run with limited liability. If there is a management structure in place, and more than one person is responsible for making key strategic decisions, it makes sense to limit the liability of any one shareholder. That said, even if you run a business in which you are the only employee like a builder, contractor or handyman it may still be a good idea to set up shop as a limited liability company.
Companies with limited liability are not just confined to SMEs. Indeed, many big franchises are run as limited liability companies (LLCs). Some of the biggest businesses in the world are run as LLCs rather than as corporations, including:
- Johnson & Johnson
- even Amazon began its life as an LLC
What sort of companies can I form with limited liability?
Unlike the US where LLC has more specific regulation, limited liability company is more of an umbrella term in the UK. If you want to create a company with limited liability these are several structures that you can use.
Limited liability partnerships
Limited liability partnerships (LLPs) are similar in many ways to regular partnerships. The business is owned by a group of between two and 20 individuals. As in a regular partnership, the company itself is not taxed, but the individual partners are. However, in a limited liability partnership, the company is an entity separate to the partners themselves.
So if one partner is sued, the others will accept no liability unless fraud or other wrongdoing has been committed.
Private limited companies
A private limited company is treated as a separate entity to its shareholders for tax, compliance and liability purposes. Individual shareholders are not responsible for debts incurred by the company.
Public limited companies
A public limited company (PLC) works in much the same way as a private limited company. However, a PLC must make its accounts a matter of public information. Shares must be available to anyone on the stock market and a quarterly dividend must be paid to shareholders.
Frequently asked questions about limited liability
What is a liability?
A liability can be anything that your business assumes responsibility for.
This often refers to debt but it can also allude to a legal obligation or risk.
Can a solo business be a private limited company?
Absolutely. You may set up a private limited company even if you have no partners or employees. This may be advantageous as it prevents you as an individual from being liable for the company’s debts.
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