Q: What’s the best business model for limiting my liability to debts?
Apr 20 2010
Answered by: Marc Barber Ask a question
If you are a sole trader, you are liable for all the money your business owes (your liability is unlimited). Your own personal assets, such as your house, furniture and car, can be seized to pay your business debts; in the final breakdown, you can be made bankrupt.
This unlimited liability also applies to conventional partnerships, with a further drawback: you are liable for you partner’s share of the debts.
By contrast, the concept of limited liability appears very attractive and applies to both an LLP and a limited company. Shareholders’ liability for debt is, inmost cases, limited to the amount they paid for their shares. The personal assets of directors can be touched only if that company has been trading fraudulently or when the directors knew it was insolvent. But this protection for your personal assets may be illusory. When you are starting in business, it is common for you as director to be asked for personal guarantees for a bank overdraft, leasing agreements, rent or credit from suppliers. However, once you have become established you may be able to shed your personal guarantees; a sole trader or partner cannot shed unlimited liability.
An LLP is a separate legal identity, like a limited company. The firm itself and negligent members of the LLP will be liable for debts with all their assets, but other members of the partnership will not.
If yours is the sort of business that buys materials or services from other businesses, needs a small overdraft or has to operate from rented premises, forming a limited company or LLP has the edge. You may be able to get away without guaranteeing all of these debts; it is certainly worth negotiating to avoid doing so.
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