The basis of limited liability is that all debts incurred by a company are the company's liabilities and are not directly the legal liabilities of the shareholders or of the directors of the company. The company is a separate legal person from its shareholders and the directors. The company incurs debts in the course of its business and only the company is liable for those.
In a company limited by shares, the shareholders' obligation is to pay the company for the shares they have taken in it. Once the shares are fully paid for (and this would usually be the case with a private limited company) no further money is payable by the shareholders.
The members of a company limited by guarantee are bound by a guarantee in the company's memorandum of association requiring them to pay the company's debts up to a fixed sum, which is usually £1.
The directors incur no personal liability as all their acts are undertaken as agents for the company. However, there are certain circumstances where liability may be imposed by the court, particularly in respect of wrongful or fraudulent trading. Also some potential creditors of a small limited company may ask the directors to give personal guarantees of the money owed to them. This is routine if a small company requests a bank loan or overdraft or when taking a lease of premises.
Being able to set up a limited liability company quickly, cheaply and easily is an important incentive for those contemplating starting a business venture. It means that personal assets, such as the entrepreneur's home or other wealth, are not put at risk. If the business fails, the owners can walk away from its debts. Only any capital committed to the company as share capital is liable to be lost if the venture fails. The UK is one of the easiest places in the world to set up a company. It is quick (on-line registration allows companies to be registered within hours), cheap (typically between £50 and £150 for a professional registration service) and easy (with the registered details being submitted on a website form).
Sometimes the easy availability of limited liability is abused, exploited by those who want to set up a business, run up debts and never pay them. Such conduct is fraud, if done deliberately, or may be wrongful or fraudulent trading. Apart from civil liability and criminal sanctions, someone behaving in this way may be made subject to a directors disqualification order. Nevertheless, there are sometimes complaints that it can be too easy for people to act in this way and avoid any legal recourse, at least for a while.
For more information about registering a limited company visit the Incorporation Services website.