When you come to choose a business structure for your company, you may come across the terms ‘private limited company’, ‘public limited company’ along with ‘limited liability’.
Today we are here to explain what these terms and types of companies mean and the key differences between them. Keep on reading to find out more so you can make the right choice when choosing a business structure for your company.
What Does ‘Limited Liability’ Mean?
Limited liability in a business is all about reducing your personal exposure to financial risk. If your business fails or is sued then the amount of money for which you are liable is limited by the business structure.
Limited liability is a form of legal protection too for both shareholders and owners, it prevents individuals from being held personally responsible for the company’s debts or financial losses.
This means the creditor, who is owed the money, can only take assets or finances belonging to the company and not personal finances from the owner or shareholders.
There are a number of different forms that this ‘safety net’ can take and there are only certain types of businesses that limited liability can apply to, such as private limited companies.
The Downfalls of Limited Liability
Limited liability does provide a layer of protection for businesses, however, in some circumstances owners may end up paying more taxes than owners of a corporation.
What Is a Limited Liability Company
This is a company that has limited liability, (LLC) often referred to as a limited company, it provides its owners with limited liability.
Companies that have limited liability are only responsible for the debts of their company up to the value of the shares they have in the business. Whilst shares are at risk, shareholders will not be personally responsible for any debt which remains outstanding.
Setting Up a Limited Company
If you want to set up a limited company you will need to register it with Companies House – a government body in the United Kingdom which has a record of all the companies registered in the UK, including limited companies and limited liability partnerships.
There are several steps to take before you set up, including choosing a name for the business as well as a registered address, deciding how many directors it will have or if it will just be you.
Another step involves obtaining a standard industrial classification of economic activities (SIC) code to identify what your company does – and you will have to register for corporation tax too.
Private Limited Companies (LTD)
A private company in the UK is one of the most popular business structures, this business structure is eligible for limited liability.
Once set up, the company is separated from finances that are personal to yours, it is its own separate legal entity. In the ever potential event of liquidation or litigation, the most you can be liable for personally is the face value of your share in the business.
Further liability must then be paid out of the company’s assets – any private assets you have should be safe.
Public Limited Companies (PLC)
A public limited company is a company that offers its shares to the public and the buyers of those shares have limited liability, meaning that they will not be held responsible for any business losses in excess of the number of shares they paid for.
Shares are traded on the stock market and can be bought and sold by anyone. A public limited company must have a share capital of at least £50,000 and so usually a company will be a private limited company before it becomes a public limited company.
A big advantage of a PLC is that it will be able to raise more capital from trading shares.
What Is ‘Unlimited Liability?
Unlimited liability means there is no limit to the amount of money for which you can be liable, which means that the business owner or owners are personally liable for all of the debts of the business, no matter what the value of it.
This applies to sole traders and the partners in ordinary partnerships. This is the reason why larger businesses nearly always prefer a structure that gives them limited liability.
The main difference between limited liability and unlimited liability is the level of risk a business is willing to take as having limited liability is a bigger risk for any business than having limited liability.
LJS Accounting Services Can Help You
Before setting up a business and business structure it is important to talk to a specialised accountant about limited liability to decide which form of business would be the right one for you.
So feel free to contact us at LJS Accounting today and we will be happy to help you with any enquiries.