Limited Company – What are the risks?
Hi, I’m thinking of starting a business because I have a great idea that I think will have low start up costs and high returns. Though the start up costs are low, they are more than I can comfortably afford to risk. I believe in my company but am not willing to put my family at risk. I wanted to set up a limited liability company and am hoping to find a loan to cover the start up costs. My concern is that even as a limited liability company, if my sales do not happen as projected and my company fails, then I would still be liable for the loan. I read somewhere that as a shareholding director, who made the decision to take the loan, then I am personally responsible if I cannot pay it back. Would this be right? Or is possible I am crossing wires with "trading as insolvent"? I would only be liable if I took on debts that I knew I could not pay, or lied about the ability to pay. I have no intention of doing this. The loan would be applied for with full disclosure of where I would get the money to pay it back, (sales), and if these sales weren’t fullfilled as forecast, this is the only reason the business would fail. Also, if the business did fail, would I be unable to take a role as a director ever again? I am being very wary due to my attitude to risk and would appreciate any comments. Thank you
If you decided to set-up a limited company, then legally you would be seen as separate from the business.
Strictly speaking, if the company took out a loan and could not repay it, then you (as a separate person) would not be liable for the debt.
The banks and most lending houses are aware of the protection provided by limited companies in this respect and therefore in all likelihood, would resolve the problem of them potentially losing money by insisting that you give them personal guarantees.
In doing this you would be effectively be relinquishing the advantage of having limited liability and be agreeing that you and the company are one and the same.
Obtaining the loan through false pretences is a whole other matter which would exacerbate any repayment problems which the threat of criminal proceedings.
In the event that the company failed, provided all debts were discharged to the satisfaction of the lenders and did not result in you being officially disqualified from acting as a company director, you would be free to register another company and to act in that capacity.
You are right to give the risks of your business venture some serious consideration before committing to a large debt which might cause issues further down the line.
Perhaps you could take another look at your idea to discover ways in which the start-up costs could be reduced even further or consider scaling back the initial launch so that lower funding is required at the beginning.
Simon - Company Formation Services
Re: What are the liabilities of a co-director/shareholder of a Private Limited Company?
I am considering setting up a Private Limited company with a friend, but I do not know him well.
Will I be liable for any fraud or illegal activities done by a co-director/shareholder, despite the fact that it is a Private Limited?
Assuming it is a Private Limited Company with 2 directors who are also shareholders. What are the liabilities of a co-director/shareholder on actions by other co-directors/shareholders?
Any other dangers involved?
Simon is correct in what he says. Whether you are personally liable for the loan or protected by the limited company will depend on the terms the banks are willing to lend to you on. In many cases the banks will ask for a personal guarantee which overrides the limited liability provided by the company.
If you were unable to repay the loan and the company went into administration then as long as this was handled properly you would not necessarily be barred from being a director. Even if the company goes down in flames you are normally only barred from being a director for a couple of years.