What is Limited Liability Company?
In the United Kingdom, a business can be run as a limited liability company. A company is incorporated by a process of registration, which involves submitting certain documents and information, including, memorandum of association, articles of association, information about shareholding, the person with significant control and paying the registration fee.
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What is Included?
- What is Limited Liability Company?
- Key Attractions
- Separate Legal Entity
- Practical Impact of Separate Legal Entity
- Companies Debts and Liabilities
- Limited Liability
- Legal action
- Criminal Proceedings
- Going Concern
- Groups of companies
- Company Information held In Public
The reasons that many budding entrepreneur and seasoned businessman prefer running a business as a limited liability company instead of a Partnership or Limited liability company Partnership include the legal protections offered to the companies under the concept of separate legal entity and limited liability company.
Separate Legal Entity
In Business law, The single most important benefit of running a business through a limited liability company is that the company has a separate legal personality. Which means that business or company is legally treated as a separate entity from its owners and the company’s acts are considered its own acts as a legal person. This means that unlike sole traders and partnerships, which in effect are the same as the people who own and run them, a company is a legal entity separate from both its owners (the members) and those people who run it on a day-to-day basis (the directors).
The company is recognised by the law as a legal person with its own rights and obligations separate from the natural persons (the individuals who own and run the company.
Practical Impact of Separate Legal Entity
- As a separate legal entity, the limited liability company owns its own property. The assets owned by the limited liability company belong to the company.
- Any contract entered by the company will be in its own name with third parties.
- The company will be responsible for all contractual rights and obligations.
Companies Debts and Liabilities
The biggest benefit of running a business as a company as limited liability company is that as a separate legal entity all debts and liabilities of the company belong to the company itself and cannot be transferred to the members and directors. The unpaid creditors can only take legal action against the company and not against the natural persons who own and run the company.
The members and directors have no direct liability for the debts of the separate entity, the limited liability company, which incurred them. Creditors cannot sue the members or the directors to pay off these debts or seize their personal assets. They can sue only the company; and if successful, they will be allowed to seize the assets of the company only. It is worth noting that if these assets are insufficient to pay off the creditors’ debts then the creditors will lose money all unrecovered monies.
Another important aspect of running a business as a limited liability company is that the liabilities of the owner of the limited liability company, generally the shareholder, is limited to the value of their shareholding. A creditor cannot sue a member directly and claim his personal assets to settle the debts of the company. If Mr A bought 100 shares at £1 each, then Mr A’s liability is limited to only his shareholding which £100. If he has not paid the full £100 when he bought the share and still owes £50, then the creditor will ask him to pay the remaining value (£50) and that is it. Mr A’s liability is a fixed, and identifiable amount at the time he bought the shares. No further money can be demanded from Mr A even if the company’s debts exceed this amount.
A company may sue and be sued in its own name. It is not for the members to sue on the company’s behalf. If Mr B fails to pay the agreed £2,000 for the goods bought from the company by the agreed deadline, the company by law must start a claim for unpaid monies in the courts in its own name. Similarly, if a creditor or a customer wishes to bring a legal action for a breach of contract or credit terms, the claim will be against the Company rather against the members or directors.
A company may also be made subject to criminal prosecution in its own right. A company may even be prosecuted for manslaughter in its own right under the Corporate Manslaughter and Corporate Homicide Act 2007. Many big types of businesses were fined and prosecuted for the breaches of health and safety regulations in the past. A criminal inquiry was brought against the VW in recent past for manipulating the carbon monoxide emission level in its diesel vehicles.
A company as a separate and artificial legal person can live forever. A company has its own lifespan independent of those who own or run it. A company is born when it is incorporated through registration and lives until it is wounder up or liquidated. The death, demise or retirement of its members and directors does not impact the company. Provisions are made in the law to ensure that retiring or deceased members’ shoes can be easily filled by new individuals.
A company, being a separate legal person, is taxed separately from the members and directors of the company, and the liability to pay tax for the company’s activities is the company’s alone. Companies have to pay corporation tax, rather than the income tax and capital gains tax. The corporation tax for the financial year 2020/21 is set at 18%.
The decisions making process in a company is undertaken by the directors and shareholders or sometimes by both jointly. The directors will take the daily decisions or operational decisions affecting the business run by the company, such as entering into contracts such as sales contracts, loans, employment contracts etc. Whereas the shareholders being owners of the company usually get involved only in the more important decisions affecting the company, including changes to the company’s constitution, for example changing the company’s name. These decisions are usually taken at meetings of directors and shareholders respectively.
Groups of companies
It is also possible and practice where common that a company being a separate legal person buys or owns property in its own name. This property may include shares in another company. In other words, one company may own some or all of another company, just as an individual may own shares in as many companies as he wishes to. This will give rise to a structure where the company which is buying the shares will be treated as parent company and companies whose shares are bought will be classified as subsidiary companies under the umbrella of the parent company.
Company Information held In Public
In order to provide transparency, as the owners of a limited liability company for the company’s debts, the companies are required to make a large amount of information available to the public. The information which is made available includes:
- The identity of the company’s shareholders, and the number and type of shares that they own.
- The identity and certain personal information about the company’s directors.
- The identity of the company secretary (if any)
- The company’s constitution (the internal rules which govern how the company should be run).
- The company’s accounts; and
- Certain decisions are taken by the shareholders.
This information is required to facilitate and assist third parties in deciding whether they wish to deal with the company. The third parties include banks, suppliers, investors, and creditors etc.