Corporate and Commercial
When establishing a new business, the extent of your potential liability for the debts and other obligations of that business is one of the key issues for you to consider.
A limited company is a separate legal entity and, as such, its financial (and other) obligations are separate to those of its individual shareholders. In other words, the shareholders in a limited company are not usually personally liable for the debts and other obligations of the company.
Instead, the liability of the company’s individual shareholders is limited to the amount that they have each invested in the company in order to help set it up to trade – if the company fails, this is how much the shareholders each stand to lose. This is the concept of ‘limited liability’.
As the name suggests, the principle of limited liability also applies to limited liability partnerships or ‘LLPs’. The members of an LLP will not usually assume any personal liability for the financial obligations of the LLP, but they will lose their individual investments if the LLP fails.
In practice, the principle of limited liability can be varied. For example, if one or more of the shareholders in a limited company (often the directors) are required to give personal guarantees to the company’s bank or landlord, or to one of its significant suppliers, those shareholders will assume personal liability for the debts/obligations of the company that they have guaranteed. Members of an LLP may be asked to give similar personal guarantees.
If you choose to operate as a sole trader, or through a ‘traditional’ partnership (i.e. not an LLP), then you will be personally liable for the debts and other obligations of the business.