What is 'limited liability' in business?Updated 06 October 2022 Show
4min read When choosing a structure for your business, you’ll come across the terms ‘private limited company’ (Ltd), ‘public limited company’ (Plc), ‘limited liability partnership’ (LLP) and perhaps even ‘limited liability company’ (LLC). What do these terms mean, and what are the key differences between these types of business? Here you can find out about the various forms of limited liability, the advantages and disadvantages of each kind, and how to get set up in your preferred structure. In business, limited liability is about reducing your personal exposure to financial risk. If your business fails (or is sued) then the amount of money for which you are liable is limited by the business structure. There are a number of different forms that this ‘safety net’ can take. Here is how each kind works. Private limited company (Ltd)The most popular form of limited liability – indeed, the most popular business structure in the UK – is the private limited company (Ltd). Once created, the company is a separate legal entity with finances that are separate from yours. This means that, in the event of liquidation or litigation, the most you can be liable for personally is the face value of your share in the business. Any further liability must be paid out of the company's assets. Any private assets you have will (usually) be safe. All limited companies must be registered at Companies House. Advantages of a private limited companyThe main reasons for choosing a limited company structure include:
Drawbacks of a private limited companyPossible disadvantages of the limited company structure include:
How to set up a limited companyTo set up a limited company, you'll need to register it with Companies House. However, there are several steps you'll need to take before that, such as choosing a name and a registered address, deciding how many directors you will have (it can be just you), and obtaining a standard industrial classification of economic activities (SIC) code to identify what your company does. You'll also have to register for corporation tax. For more details about what you'll have to do, see our guide to setting up a company. What is a limited liabiltiy company (LLC)?You may have come across the term LLC (limited liability company). This is a US business structure that is essentially the same as a private limited company. LLC does not exist as a separate structure in the UK. Public limited companyA public limited company (Plc) is similar in most respects to a private limited company. The main differences are:
Usually your company will be a private limited company (Ltd) before it ever gets to be a public limited company (Plc), so you will already be familiar with most of the advantages and responsibilities. The main additional advantage is being able to raise more capital from trading shares, while the main downside is the additional scrutiny the company will face. Limited liability partnership (LLP)A limited liability partnership (LLP) works in a similar way to an ordinary partnership, except that the partners are not liable for each other’s actions. Members of an ordinary partnership have ‘joint and several responsibility’, which means that if one partner is sued (e.g. for negligence) then all partners might have to pay damages. By contrast, in an LLP there may only be ‘joint’ liability, so although the LLP itself may be held liable, the individual partners cannot lose more than they have invested in the LLP (except in cases of fraud or wrongful trading). Like a limited company, an LLP is a separate legal entity in the UK, and must be registered at Companies House. There must be at least two ‘designated members’ who perform the necessary administrative duties. A partnership may decide to convert to an LLP when it grows beyond a certain number of partners, to reduce the risk to its members. Advantages of a limited liability partnershipThe main reasons for choosing an LLP structure include:
Drawbacks of a limited liability partnershipReasons you might not choose an LLP structure include:
Another point to bear in mind is that an LLP does not itself pay tax. Instead, each partner submits an individual tax return on their share of the profits. Ask your accountant whether this would be an advantage or a disadvantage for you. What is 'unlimited liability'?As the name suggests, unlimited liability mean there is no limit to the amount of money for which you can be liable. Unlimited liability applies to sole traders and to the partners in ordinary partnerships. This means that if the business become insolvent, or is sued, then you are fully liable for all debts and/or damages to be paid. This is why larger businesses nearly always prefer a structure that gives them limited liability. Before setting up your business structure, talk to your accountant about limited liability to decide which form would be best for you. Match meI’d like to speak to an accountant What does it mean by a company having limited liability?A limited liability company (LLC) is a business entity that prevents individuals from being liable for the company's financial losses and debt liabilities. In the event of legal action or business failure, liability is assumed by the company rather than its constituent partners or shareholders.
How does limited liability affect a company?Members aren't personally liable for actions of the company. This means the members' personal assets — homes, cars, bank accounts, investments — are protected from creditors seeking to collect from the business.
What is limited liability in business GCSE?Limited liability means that the business owner or owners are only responsible for business debts up to the value of their financial investment in the business. This means that a creditor can only take assets or finances belonging to the company.
Is limited liability good or bad?The main advantage to an LLC is in the name: limited liability protection. Owners' personal assets can be protected from business debts and lawsuits against the business when an owner uses an LLC to do business. An LLC can have one owner (known as a “member”) or many members.
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