Limiting Your Liability

Are you a sole trader or in a partnership? Are you concerned about your financial exposure during this economic downturn? If the answer to both of these questions is yes, then you should be considering converting to a private limited company or limited liability partnership (“LLP”).

By Katie Hughes 

Where a business of a sole trader or partnership fails, the sole trader or each of the partners stands to lose not only what he has invested in the business but also any private wealth which he may have regardless or whether it is in any way connected to the business. The same does not apply in respect of a private limited company or LLP.

Private limited companies and LLPs are corporate vehicles which are separate legal entities to their members. They have rights and obligations distinct from their members, own their own assets and are liable for their own debts. Most importantly, members of these corporate vehicles are provided with the benefit of limited liability, which means a member’s financial liability is limited to a fixed sum, usually the value of their investment in the company or LLP unless they have given a personal guarantee to a creditor of the company or LLP. A personal guarantee is where a member agrees to be responsible for certain debts of the company or LLP. Anyone lending money to a company or LLP, such as a bank, may require personal guarantees but these should be limited to a fixed sum.

The benefit of limited liability is clear but limited liability corporate vehicles should not be seen as a way to avoid creditors as there are a range of statutory provisions designed to protect creditors where a director or member has acted improperly or irresponsibly, including holding directors of a company personally liable for monies owed by the company or clawing back monies withdrawn by members of an LLP.

Choosing which corporate vehicle is most suitable for you depends on a number of factors. At least two persons are required to form an LLP, so a sole trader will have to form a private limited company. Otherwise one of the factors determining your choice is likely to be tax. Unlike a private limited company, an LLP is treated for tax purposes as a partnership and the members are taxed as partners, each being liable for tax on their share of the income or gains of the LLP.

If you are concerned about your financial exposure in the future now is the time to convert your business structure. Creditors of a failing business can apply to the court to have transactions set aside where assets are transferred to another party and therefore it could be too late to convert to a corporate vehicle offering limited liability in the event your business does start to suffer financially.

Katie and the other members of the Commercial Team can offer advice and information upon legal issues for businesses (including a free first a half hour consultation).

E-mail or telephone 0117 989 8510. AMD have offices at Henleaze, Shirehampton and Clifton.

This article is provided for general information purposes only and represents our understanding of the relevant law and practice as at the date of uploading. This article should not be relied upon as legal advice pertaining to any specific factual situation. Legal decisions should be made only after proper consultation with a legal professional of your choosing.

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