“Limited Liability” is a phrase that will come up a lot in any discussion about company structures. It is one of the key selling points of a limited liability partnership, and is what the “Limited” in “Limited Company” represents. Sole trader status is the only legal structure that misses out. But what does limited liability really mean, and what advantages does starting a limited company or partnership give over operating as a sole trader?
What is Limited Liability?
Technically, the phrase limited liability applies more to you than to the business. If you operate as a sole trader, you and your business are essentially one and the same. As such, you are personally liable for business debts. If operating as a company or LLP, on the other hand, that personal liability is limited. This is because starting a limited company or an LLP will mean the business exists as a separate entity, responsible for its own affairs.
Shareholders and guarantors also benefit from limited liability. If a firm becomes insolvent, they will respectively be liable to contribute the value of their shares or the amount of their guarantee. Their liability is limited to this amount.
Why Does This Matter?
Essentially, starting a limited company or operating as a partnership provides you with a safety net in the event of the business running into financial difficulty. If you and your business are one entity, then your personal assets will be vulnerable should the business get into debt. Your own money could be used to pay for the debts or your personal property sold. If your business is a separate entity and you have limited liability, then only business assets will be vulnerable. Your savings and property should remain untouched.
This will matter more for some companies than others. In some industries, there is a high level of outlay or a comparatively large risk of high-value lawsuits. In these areas, starting a limited company is almost the norm because of the risks involved. Other businesses will have very little money flowing out except in relation to work that has already been secured, and in these cases operating as a sole trader without the benefits of limited liability may be a relatively risk-free way to keep things simple.
Starting a Limited Company
For some businesses, the benefits of limited liability will be huge. But the process of starting a limited company is more difficult than that of setting up as a sole trader, and the ongoing running of the business is also more involved. A good accountant can help with the process of starting a limited company and ensure that it continues to run smoothly with relatively little extra effort on your part.