Register and Setting up a UK Limited Company

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Limited Liability

 

Does it Exist in Theory or in Truth?

The short answer is "it depends", Let's explore...

Most people in the UK own shares in a company in one form or another. Some own shares through direct investment, i.e. buy shares on the stock market, others own shares through pension funds, ISAs or tax free saving plans.

Should one or more of the companies which the individual has a stake go in liquidation and owe money to its creditors, there is no risk of the person's personal assets being exposed.

The person may lose part or all of their investment, but the losses would be limited to the amount originally paid plus any amounts which are due to be paid if the purchase was made on credit.

Compare the above scenario with that of a newly registered small company.

Whilst the limited liability shield reduces the financial exposure of the company's directors and shareholders, potential creditors, including banks and major suppliers will view their own exposure as heightened.

If the company defaults is unable to repay any debt to them, their recourse to recover the monies is limited, if not, non-existent.

Companies Viewed as High Risk

It is therefore common for banks and other businesses to view newly formed limited liability companies as very high risk, particularly if they had not had satisfactory dealings with the company's officers previously on an individual basis.

Requests for loans and credit made by a newly registered company may be declined at least until the business has a verifiable trading record.

Creditors will often want to see the company's annual accounts before allowing credit sales.

Cash on delivery is a method employed by some suppliers towards new businesses. This can make trading extremely difficult for the new company as the company shareholders may lack the funds to satisfy such demands.

Creditors, particularly banks in response to loan or overdraft application from a new limited liability company, will insist that any advances are secured or guaranteed by the shareholders.

The protection supposedly offered by a limited liability company is therefore lost. 

The essence that a company is a separate legal entity and the assets of the individuals who own it are protected no longer applies here.

The company and the individuals who own it are one and the same. In reality the company becomes much like a sole trader or partnership business where the owner's fate is linked to that of the business.

Conclusions

Limited liability is not a real protection which exists within many newly formed companies seeking significant credit or finance.

Even with a company, the risks to the individuals behind it can be significant and need to be taken seriously.

Once the company has been trading for reasonable time (what is reasonable will depend on the creditor), the terms of business should improve.

Whether or not personal guarantees are demanded will depend on the levels of credit being sought.

In terms of limiting the exposure of the business owners, a limited liability company can be a useful tool but is unlikely to be a silver bullet.

 
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