Limited liability is an important concept for start-up owners to grasp, particularly if you’re choosing a business structure for your newly formed company. Find out everything you need to know about limited liability in business, including the advantages of limited liability and the different types of limited liability companies in the UK, right here. Let’s get the ball rolling with our limited liability definition.
Limited liability definition
Limited liability is a legal status which means that a person’s financial liability is limited to a specific amount, usually the value of their investment in the business or project. Once they’ve been incorporated, limited liability companies become separate legal entities from their owners. This means that the assets or finances of the individual and the company are completely separate, and if the company incurs debts or gets sued, then the owners are only liable for up to the amount that they’ve already invested in the company.
Types of limited liability
To benefit from limited liability, you’ll need to incorporate your business at Companies House to become either a private limited company (LTD), public limited company (PLC), or limited liability partnership (LLP). Here’s a little more information about these types of business structures:
Private limited company (LTD) – Probably the most popular type of limited liability, private limited companies are entirely separate legal and financial entities from their owners, which means that your personal assets are shielded, and you’ll only ever be liable for up to the amount of your initial investment in the business. Private limited companies can issue shares, which can be a good way to raise money, and perform a range of actions on their own behalf, including purchasing assets, making investments, and opening bank accounts.
Public limited company (PLC) – Although public limited companies are very similar to private limited companies, there are a couple of key differences. Namely, shares in PLCs are traded publicly and can be purchased by anyone, PLCs need to have at least two directors (and a company secretary), and PLCs require a share capital of £50,000 at minimum.
Limited liability partnership (LLP) – Limited liability partnerships work like general partnerships, except the partners aren’t liable for each other’s actions. So, there’s no “joint liability” with a limited liability partnership. Instead, each partner can only be held liable for the amount that they invested in the limited liability partnership to begin with.
What are the advantages of limited liability?
First and foremost, the main advantage of limited liability is the fact that it prevents owners from having personal liability for company debts, allowing them to trade without putting their personal assets on the line. It’s also worth remembering that limited liability companies are taxed on profits at a rate of 19%, as opposed to the 20-45% income tax that’s paid on sole trader profits. This provides greater flexibility and gives you the chance to reinvest the surplus cash in the business. Furthermore, limited liability companies have a more credible and prestigious corporate image, which can provide a competitive advantage, particularly within high-risk industries.
What are the drawbacks of limited liability?
Although the advantages of limited liability are clear to see, there are a couple of drawbacks that shouldn’t go unnoticed. Firstly, a limited liability partnership is subject to a much greater level of regulatory scrutiny. Not only will you need to register with Companies House and submit accounts on an annual basis, but the partnership’s accounts will be made public. Furthermore, it’s much more complex and cost-intensive to set up a limited liability partnership than it is to set up a general partnership.
What does unlimited liability mean?
Simply put, unlimited liability means that there’s no limit to the amount of money you can be liable for. If, for example, the business is sued or becomes insolvent, you would be fully liable for any damages or debts that need to be paid. Unlimited liability applies to sole traders, as well as partners in general partnerships. Because of the potential financial implications of unlimited liability, most if not all large businesses prefer a limited liability structure.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.