In the world of business, having the right structure for you and your operation is vital. It can have a huge knock-on effect on the ultimate success and viability of your business. Selecting the wrong operational structure could even lead to your company failing.
The advantages and disadvantages of limited liability will ensure that the decision to implement this concept, one that could shape your operation for years to come, must be a measured one.
Whether you’re an entrepreneur looking for a new challenge or an experienced business owner complimenting a restructuring, it’s important to have a strong idea regarding limited liability, a fundamental legal concept.
What Does Limited Liability Mean For a Business?
Limited liability refers to the legal concept that states that a company is a separate legal entity to its owner/owners. This safeguards the owner’s personal assets from the debts and liabilities of the company. Limited liability means that the company as ‘an individual’ can own assets and be responsible for its own financial issues.
Limited liability is most important for corporations or Limited Liability Companies (LLCs).
The purpose of limited liability is to promote entrepreneurship, investment, and overall economic growth. If it didn’t exist, businesses would likely find it near-impossible to attract investment from anybody who didn’t have an emotional or personal link to the operation.
Additionally, investors and owners will often have large sums of money tied up in their businesses. Without limited liability, these stakeholders would likely be faced with a ‘double jeopardy’ situation. This is because these owners and directors could easily find themselves embroiled in serious financial difficulties if they are personally liable for company debts following insolvency AFTER sinking all their funds into it.
Ultimately, limited liability is there to strike an even balance between encouraging prospective owners and directors to invest and entrepreneurial-ism, and protecting their interests as well as company creditors.
The trade off with limited liability is that in return for this protection, business owners have certain legal responsibilities that they are required to comply with in order to retain this financial ‘safety’.
What Are The Advantages of Limited Liability?
Limited liability offers a number of notable advantages for business owners and investors alike, making it popular when it comes to structuring a business. These advantages include but are not limited to
Protect Your Assets
The most obvious advantage of limited liability is also the core reason why it exists in the first place. As mentioned above, limited liability exists to stop creditors going directly for the owner’s personal assets (property, vehicles, bank accounts, investments, etc.)
This allows business owners and directors to make some calculated financial risks without fear of the potential repercussions it could bring upon their personal and home life. This breeds entrepreneurship and innovation.
Increased Investor Confidence
Put simply, investors are always going to be more interested in investing in a company with limited liability. This is because their potential financial exposure will be limited to only the amount that they actually invested.
This can make finding investment and outside funding significantly easier, potentially hugely beneficial to the future of the company.
Better Business Growth
A limited liability entity is able to more easily raise additional capital by way of issuing shares to shareholders.
This easier method of raising funds is ideal should you ever wish to expand.
Tax Benefits
Limited liability companies (LLCs) offer flexibility in taxation. In some jurisdictions, LLCs can choose to be taxed as a partnership, avoiding the double taxation that can occur with corporations.
What Are The Disadvantages of a Limited Liability Company?
While limited liability does offer benefits, it’s important to also be aware of the potential drawbacks. This concept can bring additional costs, add often unwanted complexities and complications to the business, or it could lead to you losing direct control of your own company.
For a company owner, it’s vital to compare both the advantages and disadvantages of limited liability before settling on the ideal structure. You should try to seek what works best for your specific situation.
Here is just a selection of the possible disadvantages of limited liability:
Additional Corporate Complexities
The act of establishing a business with a limited liability structure can often be more complex than other, simpler structures. A corporation or LLC can also require more administrative work such as additional paperwork, necessary meetings, as well as a number of extra regulations that must be met.
Various Extra Costs
The process of creating and maintaining your limited liability company will often involve a number of extra costs on top of your usual operating costs. This includes, but may not be limited to:
- Legal fees
- Filing fees
- Compliance expenses
- Additional taxation (double taxation for corporations)
- Dividend taxation
While many of these costs may be present regardless of your business’ structure, they will often be higher for a limited liability entity.
Potential for Control to be Limited
If your business is operating with a large number of shareholders, the decision-making could become much more difficult.
The more people offering their input in the process, the more conflicts that can arise, and the more difficulties you can have coming to a consensus.
This increased competition to make decisions can, over time, result in long-term decision-makers losing some of their direct control.
Business Support You Can Trust
As outlined, while it can be an excellent framework for a company to truly thrive, there are both advantages and disadvantages of limited liability.
For the insolvency team at Inquesta, understanding all of these intricacies enables us to provide astute, all-encompassing guidance to any of our clients looking for advice.
As you weigh the advantages and disadvantages of limited liability against each other, it’s important to remember that every business in the United Kingdom, Europe, and the world is unique. There is no one-size-fits-all solution to success.
Being a successful business owner requires you to not only seize any opportunities that may arise themselves, but also be conscious of any associated risks.
By seeking out expert advice from trusted experts such as the team at Inquesta, you can equip yourself with all the necessary knowledge to help you make more informed decisions that can shape your future, ensure you maintain control, and keep your profit margins healthy.
For more information about limited liability and if it is ideal for your situation, or to learn more about how the Inquesta Insolvency team can help you, get in touch today.