What Is Limited Liability & When Is It Relevant?

Understand what limited liability structure for your business actually is and in what scenarios the status might come into play.

Updated: February 19, 2024
Matt Crabtree

Written By

Matt Crabtree

 

You'll probably hear the term “limited liability” thrown around a decent amount in business management, but it can still be a little confusing if you're only a newcomer to the scene and don't have too much experience outside of your start-up.

So, throughout this article, we're going to be taking a closer look at what limited liability is and what situations this business structure is particularly useful in so that you’ve got a better idea of whether you want to follow this company model or not.

What Is Limited Liability?

At its core, the limited liability structure is basically just a legal obligation that means business owners or investors are restricted to the amount that they have actually invested in the business.

This might seem a little complicated, so in simpler terms, it means that if a business entity — whether it's a private limited company or a limited liability partnership — faces some kind of financial trouble or legal claim against it, none of the personal assets of its owners can be seized in order to settle the company's debts.

For example, private limited companies (where the right to transfer various company shares is restricted) are usually the go to business model for companies with fewer staff members since its articles of association limit the number of shareholders that are able to invest in your company to a maximum of fifty people and the overall risk exposure is lower.

When Limited Liability Is Relevant

Generally speaking, your business having limited liability can become particularly useful in a few different situations, mainly when you're facing financial difficulties or possible lawsuits.

Let's break down why:

Protection of Personal Assets

When you're running a limited liability company, all of your personal assets — from your house to your car — are completely shielded from ever being seized to settle business debts.

As such, you can separate all of your personal and business finances, essentially allowing you to take more calculated risks without putting your entire livelihood on the line.

Mitigation of Risk

As for your investors and shareholders, limited liability means there's a lot less risk involved with their investment since they're only standing to lose the initial amount they've invested if your company somehow goes bust, rather than facing the prospect of losing personal assets beyond that.

Legal Protection

All limited liability entities enjoy legal protection under UK law and are recognized as being a distinct legal entity that enter contracts, own assets, and generally be held accountable for their actions separately from their owners — something that can absolutely boost confidence among your stakeholders.

Related Guides:

What Is Limited Liability and When Is It Relevant: FAQs

Why Is It Important for My Business to Register With the Companies House?

What Is the Difference Between Unlimited Liability and Limited Liability?

Are There Any Specific Industries or Professions Where Limited Liability Is Not Applicable?

How Does Limited Liability Affect My Ability to Secure Financing for My Business Further Down the Line?

Can I Convert My Existing Business Structure to One With Limited Liability?

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