Limited liability – what does it mean for me?

One of the key advantages of running your business as a private limited company is limited liability. But what does that actually mean?

Put simply, forming a limited company creates an independent legal entity that is completely separate from the business and its owners (the shareholders). The company can (in the legal sense!) do everything that a person can. It can enter into contracts, borrow money etc. It can also incur debts.

If the company does well, the shareholders will benefit in the form of dividends on their shares.

However, if the company's business does not do well, the shareholders don't have to help the company to pay its debts. Their liability is limited to the amount of money they have paid (or have agreed to pay) for their shares in the company.

If the business fails, the company's creditors have no recourse to the personal assets of the directors (unless they can be proven to have acted negligently or unlawfully) or the shareholders.

Compare this to sole traders or partners, who must pay the debts of the business if things go wrong - their liability is unlimited.

Our team of company formation experts is happy to provide further information on this and any other queries you may have about forming your company, so get in touch today.