Understanding Limited Liability-Is it Right for You?

You have a number of options for the type of organization you wish to operate, when you decide to form your new company. Limited by guarantee, limited liability partnerships, public limited companies:  the possibilities seem endless.

Choosing the type of company that you want to operate is an important decision. While in most cases it won’t influence your day-to-day activities, in the event that something goes awry, how you formed the company will determine the financial implications.

One way that you can reduce the impact on your finances in the event that your company is the subject of a lawsuit is by establishing a limited liability organization. Most small businesses are either private companies limited by shares or limited liability partnerships.

Private Company Limited by Shares

If you have investors in your company, but shares are not sold to the general public, then a private company limited by shares might be the solution for you. In this arrangement, the shareholders’ liability is limited to what they have invested in the company. Only certain people can buy shares in private limited companies, unlike in a public limited company, where anyone can buy in.

Limited Liability Partnership

When you go into business with another person, a limited liability partnership protects you both in the event of a lawsuit or other financial losses. Without the limited liability, creditors can seek payment through your personal assets. With such a partnership, the LLP is responsible for the debts as opposed to the individuals. With this type of company, each partner pays taxes individually, rather than through the company. The benefit of this partnership is that it allows many of the benefits of a sole proprietorship, such as not having to answer to shareholders, but with the added protection of limited liability.

When You Need a Limited Company

In general, a limited company offers you the greatest financial protection in the event that your company is sued, goes bankrupt or other issues arise that could bankrupt you personally. It’s especially useful when you are performing services that have the potential for liability, such as accounting, law or medicine, or when you want to protect yourself against the possibility that one of your colleagues makes a mistake. It keeps the debts of the company separate from your personal debts — and keeps your taxes separate, too.

If you choose to start a limited liability company, it’s important to create an operating agreement with your partners or shareholders, in order to clarify roles as well as who has the power to perform certain tasks. Without such an agreement, there can be confusion about who is in charge and who can make major decisions and sign contracts. A clear and comprehensive agreement enhances the protection that an LLP or LLC offers.

Navigating the array of company types can be overwhelming, and if you aren’t sure which is right for your situation, it’s advisable to engage the services of a company formation advisor to explain your options and help you weigh the benefits. Once you make your choice, it’s then a matter of filing the correct paperwork — and building your successful business.

About the Author:  Financial journalist Jon built his career on making complex subjects easy to understand. He regularly contributes to several blogs and print publications.


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