Starting up:
Liability to outsiders
Your liability to outsiders for the debts or obligations of your business differs significantly depending on your business structure.As a sole trader, you are personally responsible for any debts run up by your business.
In a partnership, each partner (even a sleeping partner) has 'joint and several' liability for the debts of the partnership. This means that any or all of the partners could be sued for the debts of the partnership. If a partner pays such a liability personally, he is entitled to claim a contribution from the other partners.
Because a company is a separate legal entity, it is responsible for its own debts and the liability of the members is limited to the amount of their share capital in the company. However many shareholders give personal guarantees, for example to the bank in order to obtain loans, and in this case they will retain a personal liability to the extent of the guarantee.
In a limited liability partnership the liability of the members is normally limited, and so on the insolvency of an LLP each member's liability extends only to the amount contributed as capital. Provided it is the LLP that enters into the contracts, the LLP will be responsible for all debts and obligations to third parties. There are two exceptions:
- where members have accepted a personal duty of care or a personal contractual commitment, then they will be personally liable for any breach of duty or negligence; and
- if the LLP becomes insolvent then, in certain circumstances 'withdrawals' from the firm by members in the previous two years may need to be repaid.
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Where next?
Within Your business structure...Within Starting up ...
- Developing your business idea
- Setting up
- Accounting systems
- Payroll and PAYE
- National Insurance contributions
- VAT
- Income tax
- Corporation tax
- Contact us about this issue
- Read about how we can help you & your family
- Request a meeting with us
