How Limited Liability Is Not Limited

Last week, we looked at the 7 Ways a Limited Liability Company Can Benefit You from the point of view of the shareholder. Today, we will stay in that perspective. From the viewpoint of you as a shareholder (and owner or member of the company) rather than in your role as director, we will look at how limited liability is not limited.

Your Investment

The company’s share capital can be limited to £1. However, that does not mean that you can set up a successful company with just £1. You will need to invest more than just your time. The cost of registering the company is currently £50. That money will need to come from somewhere. You will probably need to invest it. Then there are all the other initial costs. You might need insurance, an accountant, premises, a website, stock, regulatory fees, etc. These cost money. It will have to come from somewhere.

You can invest this. You can invest as share capital and set up a company with a share capital of say, £1,000. You can give it to the company. You can loan it to the company. However you choose to invest, your liability is now limited to the share capital, plus any investment you made. If worse comes to worst and the company does not make money, you will lose that investment.

Of course, we hope and expect that the company will be successful and we will recoup that investment and more.

Personal Guarantees

Another thing that limited liability does not do is make a company creditworthy. For this reason, you might need to give more than one personal guarantee.

Suppose the company wants to rent premises. The property owner will want to be sure that the rent will be paid. This is especially true where the company’s share capital is small, it has a limited credit history, or is new. You might then personally guarantee that, if the company can’t pay the rent, you’ll pay it. In this way, you will be directly liable for the rents under the terms you agree with the owner.

Your liability for the general debts is still limited to £1 (or the share capital plus your investment), but by personally agreeing to guarantee the rent, you are directly and personally liable for the rent too. If the company does not pay the rent, you need to pay it.

You may find that many companies will want you to personally guarantee payments. Large organisations that you contract with, including banks, almost always will. You should make sure you understand when you are giving a personal guarantee and always keep a record of all personal guarantees you enter into.

Now we can see that your liability is limited to the share capital, your investments and any personal guarantees you gave.

Directors

If you are a director, the fact that you are a shareholder will not protect you if you breach your duties as a director to third parties. You can be personally liable if you participate in wrongful trading (continuing to incur debts when you cannot pay them) or otherwise act illegally. If you are a director, it is important that you understand your responsibilities as a director and when you can be personally liable for things you do or fail to do. To find out more about your duties as a director, read my article on director responsibilities, coming soon.

If you are a shareholder and not a director, you too should understand director obligations. You may lose your investment if the directors you appoint do not fulfil their duties.