As a lawyer offering small business legal help in Hampshire, some of the questions that I’m often asked are those about limited liability.

What is it?

Limited liability means that, unless a director personally guarantees a liability of the company, for example if the director is a bank guarantor or a guarantor under a commercial lease, he or she is not responsible for the company’s debts if the company fails.

One of the main advantages of incorporating a business and becoming a limited company is to take advantage of limited liability.

Beware of this…

You may not know that there is an exception to the principle of limited liability. A director can be held personally liable if he or she allows the company to carry on trading – incurring debts with suppliers and other creditors – after it becomes apparent that the company is insolvent.

For this reason, it is vital that you follow these top tips to avoid personal liability:

  • Regularly review your cash flow situation and have adequate financial information to hand so you can make informed decisions – always keep a record of any board meeting discussions on this point
  • Be alert to any warning signs such as pressure from suppliers or creditors (including HMRC) for payment
  • Ensure you consider the interests of creditors when making decisions on the part of the company e.g. if paying yourself means you put another creditor at risk, think very carefully before doing so
  • Take professional advice and follow it, unless you believe there are good reasons not to (in which case keep a detailed record of why you decided not to follow the advice)
  • Consider whether it is better to cease trading and start appropriate insolvency proceedings if you believe that your company may be trading whilst insolvent. Do this before your creditors do, as this keeps more control in your hands

Are you a small business in Hampshire looking for advice on liability? Ervin Hall can review any contracts you are being asked to personally guarantee to make sure you know exactly what you are getting into and to help you minimise any risks.

We’re also able to put you in touch with advisers who can help if it appears that the company may be insolvent, or specialist insurance brokers who can help with insuring against directors’ personal liability. For more information, give us a call on 07919 164 500 or email louise@ervinhall.co.uk