What is a Limited Liability Company in England and Wales?

You may often hear talk of ‘limited liability companies’ or ‘LLCs’ in the context of business. Under the law of England and Wales, there is actually no such thing as a limited liability company (or an LLC). However, many people use LLC interchangeably to refer to a private company limited by shares. This is the most common type of limited liability business in England and Wales. This article will explain the difference between LLCs and private companies limited by shares before exploring the concept of limited liability and companies. 

LLC vs Private Companies Limited by Shares 

A limited liability company, commonly abbreviated as an LLC, is primarily a creature of the United States. It does not have any legal basis in England and Wales. 

Nonetheless, it is a common term many people unwittingly use to refer either to a private company limited by shares or, more generally, the concept of limited liability.

We will first explore the concept of limited liability before examining what a private company limited by shares is. 

Incorporation

Ownership: Natural Persons

The foundation of the English legal system largely rests on two key concepts:

• ownership; and
• liability. 

We commonly think of ownership in terms of property, such as owning:

• land;
• shares in a company; or
• intellectual property rights.

Likewise, we think of liability in terms of risk, such as the liability you may owe another person if you somehow injure them. 

However, these concepts are much broader. From a legal perspective, ownership refers to any right another person has in any asset, i.e. anything capable of holding value. Assets include houses, cars, art, and less tangible items like company shares, bank accounts, and the debts you are owed. 

Likewise, liabilities refer to the debts you owe others and certain promises you have made that have legal effects. For example, promises captured in contracts and deeds, and the legal consequences of your actions if you cause another person loss. 

Ownership: Legal Person

Non-natural persons, commonly called ‘legal persons,’ refer to entities with broad entitlements to do the same things natural persons can: owning property in their own name and assuming liabilities. 

Under English law, the most common kind of legal person is the private company limited by shares (‘limited company’ or ‘private company.’)

Concept of Limited Liability

Liability for Debts of Others

Generally, you are not liable for another person’s actions unless some relationship or agreement indicates otherwise. 

This legal concept emphasises the reality that you would not have liability over another person’s actions which you had no control over. 

Liability for Debts of an Unincorporated Business

However, suppose you and your brother run a painting business together as business partners. Likewise, he damages a customer’s carpet by spilling paint on it. Since you are in a partnership, the law holds that each partner has unlimited liability for the debts incurred by the partnership. Therefore, the customer would have a right to claim against you just as much as your brother. 

The same principle applies to running your own business as a sole trader. This is the default structure you adopt unless you take steps otherwise. Your business cannot own assets or assume liabilities because it has no legal personhood. Instead, you remain ultimately liable — without limit — for any debts or obligations your business incurs. 

In both cases, you are running an unincorporated business. The law requires a person behind unincorporated businesses to take responsibility for the actions of the business, including when things go wrong. 

But what is the case where the business is itself a legal person?

Liability for Debts of a Company Limited by Shares 

The concept of legal personhood and limited liability are closely linked.

Owners of a company limited by shares are only partly responsible for its obligations. This is because the company is its own person as far as the law is concerned. Therefore, the obligation for any debt the company owes stops with them. 

Additionally, for a company to come into existence, there must be other persons willing to ‘subscribe’ to the company. In practice, this means transferring some valuable asset, usually cash, to the company, which now becomes the business’ property. In exchange for this subscription, this person (there can be more than one) receives at least one share. Ownership of the share effectively indicates ownership of a portion of the company. 

The Limit of Your Liability 

To understand how exactly — and by how much — your personal liability is limited, consider this example. 

Let us say you, your brother, and two friends decide to start a painting business and want to trade through a company. 

You calculate the business will need £10,000 in the first year. Therefore, at the point of subscription, you each transfer the business £2,500. In exchange, each of you takes a single share. 

Since the business now owns the £10,000, it is free to use it as it wishes. 

If, in a year, the company has spent all the money and somehow owes more than £10,000, provided there was no fraud, you and the other shareholders would only be out the initial amount you put in. 

Your company’s creditors could not come after you in your personal capacity. Indeed, your personal assets like your car and house would be safe. 

Therefore, you would say your liability is limited to the value of your paid-up shares, which is £2,500. 

Unlike other forms of business structures, this means you can benefit from any additional profit the company makes while only having a small amount of liability. 

Key Takeaways 

There is no such thing as a limited liability company (or LLC) under English and Welsh law. However, the law recognises private companies limited by shares. The biggest benefit to trading through a private company limited by shares is that your liability for the company’s debts is strictly limited by the amount you have invested in the company in exchange for shares of ownership. Therefore, if something happens and the business cannot pay for its debts, creditors will not come after you in your personal capacity. 

If you need help setting up your private company limited by shares, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

Frequently Asked Questions