Limited liability

Shareholders' losses are capped at what they put in — with several important exceptions that owners routinely sign away.

What it means

In a limited company, a shareholder's liability for the company's debts is limited to the amount unpaid on their shares — usually nothing, because shares are normally issued fully paid. If the company fails, creditors take what the company has and cannot pursue the shareholders personally.

It is a protection for shareholders. It is not a protection for directors acting improperly.

Why it matters

It is the main reason limited companies exist, and it is also the most over-relied-upon concept in small business. Owners describe themselves as protected while holding a stack of documents that removed the protection.

What it looks like in practice

The common ways it does not apply:

A personal guarantee given to a bank, a landlord, a supplier or a finance company. This is the big one and it is signed constantly.

An overdrawn director's loan account at insolvency, which a liquidator will pursue.

Wrongful trading — continuing to trade when you knew or ought to have known there was no reasonable prospect of avoiding insolvent liquidation.

Unpaid PAYE and NI where a personal liability notice is issued, and certain fraud or negligence claims.

What to watch out for

The phrase "just a formality" attached to a guarantee. It is never a formality; it is the entire point of the document.

Keep a list of every guarantee you have signed, to whom, and for how much. Very few directors can produce one, and the total is usually larger than they remember.

Where to get proper advice

A solicitor before signing any guarantee. If the company is in difficulty, a licensed insolvency practitioner — the early conversation is usually free and it is the one that preserves options.