What is 'limited liability' in business?
First published 21 May 2018 • Updated 20 September 2019
When choosing a structure for your business, you’ll come across the terms ‘private limited company’ (Ltd), ‘public limited company’ (Plc), ‘limited liability partnership’ (LLP) and perhaps even ‘limited liability company’ (LLC). What do these terms mean, and what are the key differences between these types of business?
Here you can find out about the various forms of limited liability, the advantages and disadvantages of each kind, and how to get set up in your preferred structure.
What does 'limited liability' mean?
In business, limited liability is 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. There are a number of different forms that this ‘safety net’ can take. Here is how each kind works.
Private limited company (Ltd)
The most popular form of limited liability – indeed, the most popular business structure in the UK – is the private limited company (Ltd). Once created, the company is a separate legal entity with finances that are separate from yours. This means that, in the event of liquidation or litigation, the most you can be liable for personally is the face value of your share in the business. Any further liability must be paid out of the company's assets. Any private assets you have will (usually) be safe. All limited companies must be registered at Companies House.
Advantages of a private limited company
The main reasons for choosing a limited company structure include:
- Your personal assets are protected
- Companies pay corporation tax at 19 per cent (which is lower than income tax)
- The company can be run with just one member
- The company can perform actions such as opening its own bank accounts, buying property & assets, investing and taking out insurance, all in its own name
- The company can issue shares (a good way of raising capital)
- A company can retain profits into future tax years
- The company has independent existence from you, so can be sold or passed on
Drawbacks of a private limited company
Possible disadvantages of the limited company structure include:
- Reduced control – the other shareholders may dispute your decisions
- The company can’t trade shares to the general public
- More complex accounts, for which you’ll probably need an accountant
- The company’s accounts will be made public
- You will need to work out how to take an income from the company
How to set up a limited company
To set up a limited company, you'll need to register it with Companies House. However, there are several steps you'll need to take before that, such as choosing a name and a registered address, deciding how many directors you will have (it can be just you), and obtaining a standard industrial classification of economic activities (SIC) code to identify what your company does. You'll also have to register for corporation tax.
For more details about what you'll have to do, see our guide to setting up a company.
What is a limited liabiltiy company (LLC)?
You may have come across the term LLC (limited liability company). This is a US business structure that is essentially the same as a private limited company. LLC does not exist as a separate structure in the UK.
Public limited company
A public limited company (Plc) is similar in most respects to a private limited company. The main differences are:
- Shares in a Plc are traded on the stock market and can be bought and sold by anyone
- A Plc must have share capital of at least £50,000
- A Plc must have at least two directors, plus a company secretary
Usually your company will be a private limited company (Ltd) before it ever gets to be a public limited company (Plc), so you will already be familiar with most of the advantages and responsibilities. The main additional advantage is being able to raise more capital from trading shares, while the main downside is the additional scrutiny the company will face.
Limited liability partnership (LLP)
A limited liability partnership (LLP) works in a similar way to an ordinary partnership, except that the partners are not liable for each other’s actions. Members of an ordinary partnership have ‘joint and several responsibility’, which means that if one partner is sued (e.g. for negligence) then all partners might have to pay damages. By contrast, in an LLP there may only be ‘joint’ liability, so although the LLP itself may be held liable, the individual partners cannot lose more than they have invested in the LLP (except in cases of fraud or wrongful trading).
Like a limited company, an LLP is a separate legal entity in the UK, and must be registered at Companies House. There must be at least two ‘designated members’ who perform the necessary administrative duties.
A partnership may decide to convert to an LLP when it grows beyond a certain number of partners, to reduce the risk to its members.
Advantages of a limited liability partnership
The main reasons for choosing an LLP structure include:
- You have some protection from errors made by fellow partners
- The LLP can enter into contracts in its own name (rather than every partner having to sign)
- The structure of an LLP can be more flexible than that of a limited company
- You can protect the partnership’s name
Drawbacks of a limited liability partnership
Reasons you might not choose an LLP structure include:
- You need to register with Companies House and submit annual accounts
- The LLP’s accounts will be made public
- Setting up an LLP is more complex and costly than a simple partnership
- An LLP can’t retain profits in the way a limited company can
Another point to bear in mind is that an LLP does not itself pay tax. Instead, each partner submits an individual tax return on their share of the profits. Ask your accountant whether this would be an advantage or a disadvantage for you.
What is 'unlimited liability'?
As the name suggests, unlimited liability mean there is no limit to the amount of money for which you can be liable. Unlimited liability applies to sole traders and to the partners in ordinary partnerships. This means that if the business become insolvent, or is sued, then you are fully liable for all debts and/or damages to be paid. This is why larger businesses nearly always prefer a structure that gives them limited liability.
Before setting up your business structure, talk to your accountant about limited liability to decide which form would be best for you.
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