{"id":11158,"date":"2023-11-29T19:49:30","date_gmt":"2023-11-29T19:49:30","guid":{"rendered":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/?p=11158"},"modified":"2024-09-15T15:13:18","modified_gmt":"2024-09-15T14:13:18","slug":"extent-of-limited-liability-in-a-company","status":"publish","type":"post","link":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/extent-of-limited-liability-in-a-company\/","title":{"rendered":"What is the extent of limited liability in a company?\u00a0"},"content":{"rendered":"

Limited liability is a legal principle that limits the extent to which members of a limited company are personally responsible for the debts or financial losses of the business. Depending on the type of company, members’ liability will be determined by the nominal value of their shares or their ‘guaranteed amount’. Under certain circumstances, company directors may also be held liable for company debts, but this is not typical.<\/p>\n

In this blog, we discuss the extent of limited liability as it applies to the members and directors of a company, touching on the situations where it may be disregarded, and the resulting consequences. We also explain how it works in a limited liability partnership (LLP).<\/p>\n

Limited liability of company members\u00a0<\/span><\/h3>\n

Limited liability is one of the key features of companies limited by shares and companies limited by guarantee. Both types of companies exist as distinct legal persons in their own right, which means they are responsible for their own actions and financial obligations. Consequently, members are protected from personal exposure to significant financial risk.<\/p>\n

\n \n \"Revolut\n \"Revolut\n <\/a>\n <\/div>\n \n

In a limited by shares company, the liability of members (known as shareholders) is limited to the fixed nominal amount that they agree to pay for their shares.\u00a0<\/span><\/p>\n

In a limited by guarantee company, the liability of members (known as guarantors) is limited to the amount that they agree to contribute to the assets of the company if it is wound up. This is referred to as a \u2018guaranteed amount\u2019 or ‘guarantee’.<\/p>\n

What does it mean when a company is limited by shares?<\/span><\/a>\n Where is the best place in the UK to start a business?<\/span><\/a>\n Why would I set up a limited by guarantee company?<\/span><\/a>\n <\/p>\n

Generally, companies choose to set the nominal value of shares and guarantees at \u00a31 – a very small sum. This means that, in the vast majority of companies, the financial liability of members is just \u00a31. However, if a shareholder owns multiple shares, they are liable for \u00a31 for every share they hold.\u00a0<\/span><\/p>\n

For many shareholders and guarantors, this is the maximum sum they are legally required to contribute toward the debts or financial commitments of the company if it becomes insolvent or is wound up. Beyond this, they only risk losing the capital they already invested in the business.\u00a0<\/span><\/p>\n

Most shareholders pay for their shares as soon as they take them. In such instances, they have no further financial obligation to the company. However, if they take any of their shares on an unpaid or partly-paid basis, they must contribute the outstanding amount when the company requests payment.\u00a0<\/span><\/p>\n

Guarantors, on the other hand, only pay the guaranteed amount if the company is unable to pay its debts, or when it is being closed down.<\/p>\n

Limited liability of company directors\u00a0<\/span><\/h3>\n

The situation is different for company directors. Unless they are also shareholders, they do not usually have any financial obligation to the companies they run. However, this protection from liability does not extend to directors in all situations.<\/p>\n

If a director signs a personal guarantee for a company loan, for example, they are personally responsible and ultimately liable if the company is unable to satisfy this financial obligation. Similarly, if they have an overdrawn director’s loan account<\/a> (i.e. they owe money to the company), they remain liable for any outstanding balance even if the company becomes insolvent.<\/p>\n

\n \n \"Get\n \"Get\n <\/a>\n <\/div>\n \n

Limited liability protection may also be disregarded if a director is found to have acted in a manner that is deemed improper or unlawful. This may be due to actions such as:<\/span><\/p>\n