When deciding whether to open your own company, there are many things to consider. One of these things is the type of company you wish to set up. In this blog, we’re letting you know the details of a limited liability company in the UK.
What are the different types of companies in the UK?
In the UK, there are a couple of common ways to run a company. One of these is through limited liability, which we will be explaining more about in this article.
Another common option is to be a sole trader. A sole trader is someone who is self-employed at their own company. Anyone can choose to be a sole trader with minimal setup requirements.
There are advantages and drawbacks to both options, and it’s important that you are aware of these. If your business were to enter some form of liquidation, the process would vary depending on how your company has been set up.
Generally, sole traders are responsible as individuals for things that happen to the company. This means more financial risk is involved with being a sole trader business owner. Sole traders benefit from keeping all their business profits after paying income tax. Sole traders do not need to register on Companies House, whereas limited companies do.
What does limited liability mean?
All limited companies in the UK have ‘limited liability’. Limited liability refers to having more protection as individuals as the company is its own legal entity.
All assets belonging to the private limited company are not affected by the directors and vice versa. This means that if the limited company ends up in financial trouble, the directors are not legally liable for paying back the money. However, there are some instances where limited liability does not cover you as a director despite being a separate business entity – we’ll get onto those.
There are also various types of limited liability companies, including the following.
- Private limited companies (private company limited by shares, private company limited by guarantee)
- Public limited company
- Limited liability partnership
- Unlimited Liability Company
What are the advantages of a limited liability company in the UK?
Owning a limited liability company in the UK has many advantages, but you must ensure that it’s the right step for you. Make sure you complete research into your chosen business structure.
- Claim on company expenses (equipment, travel, internet)
- Efficient tax processes
- Personal assets are protected
- Easy to establish and maintain
- Perceived as being a more credible business
- Limited company name protection
- More legal protection
- Not personally responsible for debt incurred by the private limited company
Some of the disadvantages of a private limited company can include paperwork and account filings. For those earning less money through their companies, it may be more beneficial to be a sole trader rather than a limited company.
When are you not covered by limited liability?
Sometimes, limited liability will not protect you as a director. You should avoid these situations as there can be some very serious consequences involved.
Personal guarantees
Personal guarantees are always signed by directors and never by limited companies. If you have signed a personal guarantee, you will be responsible for paying it back despite your company being a separate legal entity.
A personal guarantee is a sum of money that is requested before funding is given to the company. It means that the company or person lending the money has a safety net if your company cannot repay the money.
It is very unlikely that you’d be able to avoid paying a personal guarantee. So, if you do choose to sign one, make sure that you can afford to pay, even if the company goes bust. In some cases, some lenders may agree to a deal with you for paying it back, where you do so over a period of time, but this may not be an option.
If your company is in financial difficulty, you’ll also need to be wary of making preference payments. This is where you pay one creditor before another is due payment. This can land you in a lot of trouble and should be avoided when it comes to personal guarantees.
Not adhering to your directors’ duties
As a limited company director, you have a range of responsibilities that you must adhere to. These include things like seeking insolvency advice early regarding the company’s debts.
Once you notice that you have an insolvent company, you are required to put the creditor’s interests above the company’s and its directors and shareholders. Failing to do so can lead to you being held liable for business debts incurred.
Not adhering to your duties as a director can land you in trouble during the liquidation process. Simply seeking advice and entering a voluntary liquidation can show that you are adhering to your duties.
Fraudulent trading
Fraudulent trading can include many things, such as trading while insolvent, taking money from customers without intention of delivering or even actions taken relating to your bounce-back loan.
The bounce-back loans were given to businesses struggling due to the Covid-19 pandemic. Upon applying, most businesses were required to provide their actual turnover to decide how much they could apply for. Newer companies, however, were required to give expected turnovers. This opened the door to businesses inflating their turnover.
There are various types of bounce-back loan fraud, such as inflating your turnover or spending the money for personal benefit rather than to benefit the company which it was intended for.
What happens to a limited company in liquidation?
You should be protected by limited liability if you have acted responsibly as a director and have not committed any wrongful trading. This means that your unsecured debts will be written off in a liquidation.
If you have failed to act responsibly, your limited liability status will not protect you. You will likely face personal liability for company debts.
It’s very important to seek advice when you notice your company becoming insolvent. Make sure that you find a high-quality insolvency practitioner and that you are open and honest with them. There’s no point hiding things from them as they will be uncovered. It’s better that you are aware of your situation and work with them to find solutions rather than having to deal with them later down the line.
We support directors with all aspects of liquidation and company closure. We can provide you with honest, reliable and confidential advice regarding your personal circumstances. Feel free to book a call with one of our experts, who is ready to support you.
I'm Chris Worden, Managing Director at 1st Business Rescue. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
I am proud to say that we are one of the only 5-star corporate insolvency companies on Trustpilot with hundreds of 5-star reviews, and we publish videos weekly on our YouTube channel. Our channel is designed to educate UK directors about insolvency and debt advice. Check it out here:
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