A guide to small business liability – get incorporated or take a chance

If your business runs up debts, who is responsible for covering them? Unless limited status has been secured, covering small business liability, that falls to you.

A limited company ensures all members of the business have limited liability – their liability in the business is capped at what they have invested in the company.

In practice, what this means is that the business is a legally separate entity from the people who run it, and its finances are separate from personal finances. Limited liability is a great advantage as it means limited risk.

"The director’s/shareholder’s personal property and actives will not be used to cover any debts which occur by the company activity. This is the main advantage of creating a limited by shares company," explained Evan Kenty, director of ZDK Formations Limited, a registered Companies House Agent.

Some business types, such as sole traders, do not have this advantage. Someone operating as a sole trader has no separate legal existence from their business, and is personally liable for the business’ debts. This is, by contrast, unlimited liability.

In the UK, there are two kinds of limited company – public limited companies (plcs) and private limited companies (ltds). In private companies, there are restrictions on who can purchase shares, but in a public company they are open to everyone.

What are shares?

A share is a portion of the business, and a shareholder is someone who has purchased shares and therefore a stake in the business. Sometimes, shareholders are referred to as members of a corporation.

Often, founders are keen to remain the majority shareholder, which means retaining at least 50 per cent of the shares. In doing this they can retain control of the business while still selling shares to raise share capital.

"The number of shares can range from one share to one million shares. Usually people use 1,000 shares priced at £1. It is also included in the application for company incorporation," said Kenty.

"Because shareholders are a company’s owners, they reap the benefits of the company’s successes in the form of increased stock valuation."

What is required?

To set up a private limited company, you need to register with Companies House in a process known as incorporation.

To get started, the business will require at least one director, who can also be a shareholder and a secretary in the company.

"This person will be responsible for all the actions which business will do, limited by the shares. Also, you will need a business address which needs to be in the UK," said Kenty.

"In the application, there is a question about SIC codes – you will need to describe the new business activity using these codes (for example if your new business will be producing poultry products you will need to include the SIC code – 10130 Production of meat and poultry meat product). We help our clients to define the codes depending on the activity of their business."

What support is available?

Setting up a limited company can sound complicated, but it’s worth it if you’re starting a new business and don’t want to shoulder all the financial risk.

There are businesses out there, like ZDK Formations Limited, that can provide support for the process of online company incorporation, accounting services such as VAT registration and VAT returns, legal advice, business bank account set up and ongoing support throughout the company’s lifetime.

Don’t stick your head in the sand – if you’re starting a new business, make sure you’re protected or run the risk of digging in to your own pockets if it runs up debts.

For the full list of services please visit the ZDK Formations Limited website.

Online Company Formations Services in the UK. Simple application process of a business formation, registered by Companies House. Our services are optimal for overseas clients