In the UK, the origins of limited liability go back as far as the 15th century
This was when it was awarded under English law to monastic communities and trade guilds holding common property.
Today, the principle offers a level of protection to directors of all kinds of businesses trading as limited companies. With this protection though come legal responsibilities, which all directors need to understand – particularly with regards to how these responsibilities change should a business get into financial difficulty.
Under normal circumstances, the role of a director is to run a business for the benefit of shareholders, working to maximize profits so they receive the best dividends the business can deliver.
But even the healthiest, best run business can hit tough periods, and when things get especially tough, the law requires directors to switch their focus, and to begin running the business for the benefit of creditors – the organisations and individuals it owes money to – rather than for its shareholders.
It’s highly unlikely that a radical change in fortunes will come completely ‘out of the blue’, and diligent directors will be aware of how their business is performing, but the key signal for this fundamental shift in focus will be flagged up on the company’s balance sheet – when the heading ‘Shareholders’ Funds – a positive figure changes to ‘Shareholders’ Liabilities – a negative figure.
Directors ignoring this ‘red light’ expose themselves to a range of risks:
- Personal assets may be liquidated to pay off company debts. This might include property, vehicles and savings
- They could find themselves liable for prosecution
- They could be disqualified from being allowed to run another company for a period of time (which can be indefinite)
- Renting out a room in your main home for more than the Rent a Room threshold
Living abroad & renting out a property in the UK
- Living in the UK & renting a property abroad
- Renting out a holiday home even if you use it yourself
The clue is in the name: Limited liability is just that – limited
It only protects directors who exercise their duties professionally, competently, and in line with their legal responsibilities. The extent to which the directors of a limited company can find themselves in trouble relates directly to how the problems of their company impact onto other businesses. The situation can be further compounded when directors who are also shareholders in their own company – and normally use dividends to remunerate themselves, borrow from the company when there are insufficient funds available to pay dividends. If the company fails, directors owing money will need to pay it back – and both the directors and the company may also be liable for tax.
If a business is reaching a point where it may not be able to fulfil all its obligations then, the directors have some very serious decisions to make, and they might well need to appoint administrators or liquidators. While no one wants to see a company fail, if it has to close, it’s far better it does so without financial hardship for the directors, customers or suppliers.
Clearly it’s vital for all directors to be fully aware of how their company is performing at all times – which brings us back to the Inca mantra….information, information, information! You have to know how you’re doing to know if you’re heading towards a problem, and that means you need to have financial information available to you on a regular basis – ideally monthly, quarterly, or at the very least, as soon after your financial year end as possible. You certainly shouldn’t be waiting until your filing deadline is looming!
Employing a bookkeeper or management accountant is not within everyone’s budget. At Inca, we provide our clients with solutions that are appropriate to their needs – from simple tools that give them an insight into their position, and training them on their own accounting systems, to providing management accounts on an outsourced basis.
With Inca alongside you, you’ll be able to understand and interpret your management accounts, take key decisions – and easily identify how much money is available to be drawn as dividend at any point in time. With this level of support, you’re business has every chance of thriving!