Limited liability when forming a company: what are the benefits?

Thinking about setting up a limited company? You’ve probably already seen the term limited liability floating around — it sounds like complicated legal jargon, right? 

We get it. However, this is one term every founder needs to understand, as it’s the biggest benefit of forming a limited company. 

We’re here to explain what limited liability is, why it offers you huge peace of mind, and why knowing about it is key to deciding the best legal structure for your new business. It’s not complicated, we promise.

Key takeaways

• Limited liability protects your personal assets (like your home and car) if your business runs into trouble, like getting into debt
• A company with limited liability is generally viewed as more trustworthy and can find it easier to raise investment
• While there’s a bit more admin, the benefits often outweigh the extra steps

Limited liability is a legal structure in which a business owner’s personal assets are protected from business debts. If you have limited liability, it means you and your business are completely different entities and your financial responsibility (or your ‘liability’) for your company’s debts is therefore limited.  Limited liability is a bit like a shield, protecting your personal finances from the ups and downs of your business. 

For example, if your business runs into tricky times, like debt or if it’s successfully sued, it means that the creditors can only claim your company’s assets — like your company’s bank accounts, vehicles or equipment like office furniture. They can’t touch your personal assets like your house or car.

In such instances, with limited liability, the financial risk you face is capped at the amount you originally invested in your business — usually the nominal value of your shares (often just £1).

This protection is the reason why so many business owners choose to form a limited company — it comes with limited liability.

Now, let’s look at the flip side: unlimited liability. 

Unlimited liability applies to business structures like sole traders and traditional partnerships. In these structures, the company owner (or owners, if you have co-founders) and the company itself are seen as the same legal entity. There is no legal wall between your work finances and your personal finances. This means that if the business gets into debt or faces a legal claim it can’t pay, the creditors have the right to pursue your personal assets, like your home or car, to cover the money your company owes. 

It’s definitely something to consider if you’re weighing up your business structure options.

The advantages of limited liability go well beyond personal asset protection. It can also help with business growth, company reputation and investment too. 

Let’s take a look at some of the main benefits of limited liability in more detail:

It’s worth reiterating that limited liability provides security for you, your family, and your future. 

Less personal risk means you can take riskier business decisions with more confidence. This could include getting into partnerships or borrowing money — all safe in the knowledge that your home, car, and personal bank accounts are protected from the vast majority of business debts, legal fees, or damages your company might face. 

When you set up a company with limited liability, you’re showing the world that you’re serious about business.

This is because limited companies have specific filing and reporting requirements, like submitting annual accounts to Companies House and paying corporation tax to HMRC. 

These official reporting requirements often give banks, suppliers, and even potential customers confidence because they’ll view your limited liability business as more credible and trustworthy, opening doors to better deals and opportunities.

If you plan to bring in investors, operating under a company structure that has limited liability (like a limited company as opposed to a sole trader) is generally preferred.   

Investors and lenders prefer to work with limited liability businesses because:

It’s more transparent: The financial records and reporting requirements of a limited company (which are publicly available on Companies House) make it much easier for investors to check out your company’s health and prospects. This can speed up the investment process.

The structure is familiar: The process of selling shares is clearly defined under UK company law

Their liability is limited: Just like yours, their personal risk is capped at the value of their investment in your company. This makes putting capital (money) into your business much less risky for them

It’s fair to mention that limited liability does come with a couple of drawbacks. But they are usually outweighed by the protection you gain. Let’s take a look at these disadvantages in more detail:

Every limited company must file annual accounts and confirmation statements with Companies House. This information, including your company’s balance sheet, profit and loss details and director details, is available on the Companies House public register for anyone to see.

Good to know: 

• Sole traders (a structure with unlimited liability) do not have to publish their business accounts and can keep their finances private 
• Other unlimited company structures, like some partnerships, have the option to keep their financial information private, as long as they don’t fall under certain exceptions, like being a parent or subsidiary of a limited company or operating in specific sectors, like banking

If you’re someone who prefers to keep your business finances private, confidentiality is an important point to consider.

There’s a bit more paperwork involved with a limited company. Among other things, you have to file annual statutory accounts, a confirmation statement and a corporation tax return every year, alongside your own self-assessment tax return.

Don’t worry, though. While there’s a bit more paperwork, tools like a smart business current account app with built-in financial reporting can make keeping track of income and expenses quick and easy. It’s basically doing a lot of the hard work for you. 

Limited companies have to follow the rules set out in the Companies Act 2006, especially when it comes to activities like distributing funds to shareholders. This is primarily through dividends, which are paid from the company’s distributable profits after all taxes and expenses have been paid. 

Unlimited companies, on the other hand, have much more flexibility in this area. They don’t have to follow the Companies Act 2006 when it comes to financial processes, like returning capital to shareholders. However, the trade-off is that unlimited companies can’t be publicly listed. 

So, if you’re dreaming big, a limited company might be the better business structure for you.

Choosing the benefits of limited liability or the simplicity of a sole trader is a personal decision based on how you feel about risk, the industry you’re in, and your company growth plans. You don’t have to figure it all out alone — we’ve got you. Here’s a quick recap of the pros and cons of limited liability based on three common business structures:

Remember, every business has different needs, and what’s perfect for you might not be for someone else. 

But if your small business carries financial risk, involves contracts, or if you plan to grow and employ a team, the financial protection offered by a limited liability is hard to beat. 

If you’re ready to take the leap and set up your company, Countingup’s company registration service is quick and easy. You can be trading in as quickly as 24 hours! Before you start, though, it’s a good idea to check if your preferred business name is available using our company name availability checker. 

In the meantime, good luck. You’ve got this!

A limited liability company (LLC) is a type of business structure used in the US. The name is confusingly similar to a limited company, but the rules are different. The UK equivalent to an LLC (that provides the same financial protection) is the private limited company (Ltd) or, for certain professional services, a limited liability partnership (LLP).

Yes, absolutely. Private limited companies (often shortened to Ltd) are the most common form of business in the UK, and their main feature is that they offer limited liability to their directors and shareholders. This means the owners are generally protected from the company’s debts.

No. Sole traders operate with unlimited liability. This means that legally, there is no separation between the owner and the business. If the business accrues debt, the owner is personally responsible for paying it, meaning their personal assets are at risk.

No. Despite the name, limited liability partnerships (LLPs) are treated differently for tax purposes. While the LLP itself is a separate legal entity offering limited liability, the partners themselves pay income tax and national insurance on their share of the profits. The LLP doesn’t pay corporation tax.