A limited liability company (LLC) is a business structure where owners’ personal financial risk is limited to the amount they invest. In simpler terms, if the business runs into debt or faces legal action, the owners' personal assets like their home or savings are generally protected. In this guide, we’ll explain what LLC means, how they work, and what you need to know about them in the UK.
What is limited liability?
Limited liability is a legal structure that limits the financial exposure of a company’s shareholders or owners. In the event of bankruptcy or other financial difficulties, the liability of individuals is restricted. Liability is limited to what has been invested in the business or guaranteed in the case of limited-by-guarantee companies.
Key features of limited liability
Protects personal assets from being used to settle business debts
Encourages investors to support businesses without risking more than they can afford
Ensures that the company’s legal identity is separate from its owners
Limited liability company (LLC) meaning
In the UK, the term limited liability company (LLC) doesn’t officially exist, but it’s often used to describe a private limited company. An LLC, more common in the US, blends the liability protection of a corporation with the flexibility of a partnership. This type of structure keeps personal finances separate from business risks. In the UK, a private limited company (Ltd) offers similar protections to its shareholders or guarantors.
Features of an LLC
Limited liability: Owners are only responsible for debts up to their investment.
Flexible management: Offers more management freedom than a corporation.
Tax advantages: In some countries, profits can pass directly to owners without corporate tax.
💡Editor’s insight: “In the UK ,an Ltd typically serves the same purpose as an LLC in other countries. If you want to set up an LLC, the closest structure to choose is an Ltd structure.”
What types of companies have limited liability?
Several business structures offer limited liability protection. Here are the main types:
1. Private Limited Company (Ltd)
A private limited company (Ltd) is the most popular type of limited liability business in the UK. It’s privately owned and can have one or more shareholders. The key benefit? Shareholders are only responsible for business debts up to the value of their shares, meaning personal assets are usually protected. Want more details? Check out our guide to private limited companies.
2. Public Limited Company (PLC)
A public limited company (PLC) is similar to an Ltd but with one major difference: it can sell shares to the public through the stock market. Like Ltds, a PLC limits shareholders’ responsibility to the unpaid value of their shares. PLCs are often used by larger businesses looking to raise capital from public investors.
3. Limited Liability Partnership (LLP)
An LLP offers the best of both worlds: the flexibility of a traditional partnership and the personal liability protection of a company. Each partner’s financial risk is limited to the amount they agree to contribute. LLPs can be a great option for professional firms like solicitors, accountants, and consultants who want to share management duties while protecting personal finances.
4. Community Interest Company (CIC)
A CIC is a business that prioritises social good over profit. It can be set up as limited by shares or limited by guarantee. While CICs offer limited liability, they are specifically designed to benefit the community rather than private shareholders. They’re ideal for organisations driven by social or environmental goals.
5. Companies Limited by Guarantee
Unlike companies with shareholders, those limited by guarantee have members who agree to pay a specific amount if the business goes into debt. This structure is often used by non-profits, charities, and community organisations like sports clubs. Members’ liability is limited to the agreed contribution, making it a secure option for groups working for a cause rather than profit.
Examples of limited liability companies
To understand how limited liability works in real-world settings, here are a few real world examples:
1. Tech start-up (Private Limited Company)
A group of entrepreneurs forms a private limited company to launch a new software product. Each founder invests £10,000 in the business. If the company fails and incurs £50,000 in debts, their personal liability is limited to their initial investment.
2. Law firm (Limited Liability Partnership)
A group of lawyers forms an LLP to offer legal services. The partnership agreement specifies each partner’s financial contribution. If the LLP is sued for malpractice, the partners’ personal assets remain protected.
3. Charity organisation (Company Limited by Guarantee)
A charity focuses on providing educational resources to underprivileged communities. Its members guarantee £1 each to cover liabilities, ensuring their personal finances are not at risk.
4. Public corporation (Public Limited Company)
A large retail company goes public, offering shares on the stock exchange. Shareholders’ liability is limited to the value of their shares, even if the company faces significant losses.
What is unlimited liability?
Unlimited liability is the opposite of limited liability. In this structure, the business owner(s) are personally responsible for all debts and obligations incurred by the company. This means creditors can pursue the owners’ personal assets, such as their home, car, or savings, to settle outstanding debts.
Common characteristics
Typically associated with sole traders and general partnerships.
Higher financial risk for owners, as there’s no separation between personal and business assets.
Not suitable for businesses that plan to take on significant debt or legal obligations.
Example
A sole trader runs a small bakery but fails to pay a £20,000 loan. Since the business has unlimited liability, the lender can seize personal assets like the owner’s car to recover the debt.
FAQs
What is the difference between an Ltd and a limited liability company?
The term ‘Ltd’ is specific to the UK, whereas ‘LLC’ is commonly used in countries like the United States. In the UK, a private limited company (Ltd) is a type of limited liability company. Both structures offer similar benefits, such as protecting personal assets and separating business liabilities from owners.
What is the difference between limited and unlimited liability?
Limited liability: This protects personal assets, leaving only the amount invested or guaranteed at risk.
Unlimited liability: Owners are responsible for all debts, risking their personal assets.
What qualifies you to be a limited liability company?
To qualify as a limited liability company in the UK, you must:
Register with Companies House.
Have a unique company name.
Provide a registered office address.
Submit necessary documents, such as a memorandum of association and articles of association.
Final thoughts
A limited liability business can be an excellent choice for entrepreneurs and businesses looking to protect their personal assets while operating a company. It's crucial to understand the different types of limited liability structures and their benefits. When you do, you can choose the right setup for your business needs.
If you’re starting a private limited company, a small business solicitor can help. Always seek professional advice to ensure you make the best decision for your specific situation.
References
Set up a private limited company from Gov.UK
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant or business advisor. Bear in mind that tax rules can change and will differ based on your circumstances.