In what sense is your liability limited if you run a company?

One of the main attractions of working via your own company is that the liability of shareholders is limited. So, to what extent is the liability of company directors limited?

One of the most appealing aspects of running a contracting business through a company is the limited liability it provides. This means that, as a general rule, if something goes horribly wrong with the business, your personal assets are protected from any creditor claims.

It can give be a huge relief to know that negligence by you (or one of your employees) should not cause you to lose your home or life savings.

However, just because you have a company does not mean that you can throw caution to the wind, as there are ways that this limited liability can be negated. This means that if you’re not careful you could be putting your personal assets at risk without realising it. Here we look at some of the more common risks to limited liability.

Limited liability only relates to shareholders

The limited liability of a company is set out in section 3 of Companies Act 2006 which states that “A company is a ‘limited company’ if the liability of its members is limited by its constitution”.

Therefore the owners of a private limited company will only be liable for the debts of the company to the extent that it is so set out in the company’s constitution. Generally, this means that a shareholder only has to contribute the amount per share that they have agreed to pay for the subscription.

Directors are not actually covered by this rule and a director of a limited company is in the same position as a director of an unlimited company.

Acting as the company

Directors (and indeed employees) are generally considered to be acting on behalf of and in the name of the company. However, this should always be made clear in any business you are undertaking because otherwise you may become directly liable.

So for example, if you send an email to a supplier ordering goods and it does not have the company name in the signature, then the supplier might (reasonably) believe that you are ordering the goods in your own name. They are then potentially able to sue you for the money rather than the company.

The Companies (Trading Disclosures) Regulations 2008 set out how and when a company should disclose its full name (which includes the word Limited) and these should always be complied with.

Complying with duties as a director

The law imposes many obligations on a director of a company. The main duties are set out in sections 171 to 177 Companies Act 2006 although there are other duties depending on the circumstances. Failure to comply with these duties can lead to personal liability (including criminal liability) on a director and should be taken very seriously.

One of the more common areas for directors to get in trouble is when a company is facing insolvency. The Insolvency rules impose considerable further obligations on directors of a company facing insolvency that are designed to protect the interests of creditors and employees. You should always get in touch with an insolvency practitioner if you are in any doubt over these as the penalties can be serious.

Personal Guarantees

Sometimes a bank or other creditor will ask for a personal guarantee from one or more of the directors/shareholders of a company. Consequently, depending on the terms of the guarantee, the director/shareholder can still be liable for the debts of the company if the company does not pay them. You, therefore, need to be very careful before giving a personal guarantee and consider the extent of it very carefully.

Further Information

This article has been provided by Elemental CoSec, expert providers of UK company secretarial services. Please get in touch with them if you would like more information on this on any of the above topics.

This article is provided for information only, is not exhaustive and should not be relied upon. Professional advice should always be obtained if you are unsure of your obligations.