If you’re a director or shareholder in a limited company or LLP, you may be wondering what limited liability means.
Particularly when a business runs into financial jeopardy, the meaning of this term becomes crucial in limiting the fallout from failed corporate enterprise.
Read on to discover our full guide to limited liability status.
A limited liability company means that losses from corporate insolvency will never exceed what’s been invested into it.
The Ltd company structure hinges on what it known as the ‘corporate veil,’, that is a clear line of distinction between the assets of the company and those of the individuals and investors involved with it.
When an individual is working as a sole trader, there is no legal seperation between their business and personal assets. Many directors find this choice of structure something they wish they’d thought through more carefully when creditors come knocking.
Company Limited by Shares
In a company limited by shareholders, corporate shareholders will never have to risk more than the value they have paid for their shares.
Company Limited by Guarantee
Company’s Limited by Guarantee are ofen charities and the structure revolves around a nominal ‘guarantee’, often £1, which becomes the members maximum liability.
Can Directors Be Personally Liable for Debts in a Limited Liability Company?
In general, the structure is there to limit personal liability.
However, exceptions exist where the directors are convicted of misfeasance, the penalties for which include assigning company debt to the individual responsible.
The more obvious exception involves personal guarantee documents which we discuss below.
Personal Guarantees and Limited Liability
The personal guaranteee document, signed commonly by a director as additional security for a business loan, has one purpose which is to breach the corporate veil. By signing such a document the guarantor specifically gives up the protection of the limited liability structure, usually with reference to a named asset such as a family house.
Personal guarantee documents are highly enforceable and we always recommend directors consider personal guarantee insurance before signing one of these.