An advantage of setting up a limited company is often thought to be that the liabilities lie with the company, so the assets of the directors are not affected. This is broadly correct, but there are some circumstances when a director can face personal liability.
Directors personal guarantee
A circumstance when directors could find themselves liable is when they have provided a directors personal guarantee for the company to acquire premises. If the company needs a mortgage, this will be secured against the assets of the director or directors, making them liable if the company is unable to make the repayments. If a director is considering signing a guarantee, it is essential they obtain independent legal advice before signing. For the best results, use a legal firm with experience in these matters such as Parachute Law.
Franchise businesses
If your limited company is a franchise, you will have the usual protections of a limited company; however, these can be lifted if the director is in breach of their duties. The Gazette has more information on the statutory duties of company directors.
If the franchise business is getting into financial difficulty, it is essential for the director to take advice before the point when they will risk becoming personally liable. When gaining the rights to operate a franchise business, the franchisor will likely want a personal guarantee of the company’s obligations from the directors and shareholders.
Failing obligations
A director of a limited company has many obligations, such as filing the proper records, entering contracts in good faith, and ensuring the right amount of tax is paid. If the director fails in these obligations, they may find themselves facing personal liability.
Personal liability
Setting up a limited company is the safest way to protect personal assets, so the liability is to the company and not the individual directors; however, for anyone considering becoming a director, it is important to remember that this is not a completely blanket protection and that there could be circumstances that mean directors become personally liable.
