What is Limited Liability?
When someone asks me why I should choose a private limited or one-person company instead of a partnership or sole proprietorship, I use it to explain the main advantage of a limited company, which distinguishes it from a firm, which is ‘Limited Liability’. But what does that mean? That’s what we are going to look at in this article.
What is Called a Company?
A company is a Legal Entity registered under the Indian Companies Act, 2013.
The various forms of Companies are Private Limited Company, One Person Company, Public Limited Company, Non-Profitable Company, and so on.
It is completely different from a Firm. One thing that majorly differentiates a company from a firm is Limited Liability.
What is Limited Liability?
Limited Liability is a legal structure in which a shareholder’s responsibility is limited to loss or liability. In simple words, Limited liability is the extent to which a company shareholder or director is financially responsible for their company’s debts.
Once it has been incorporated, the business becomes a separate legal entity from its owners. This means that the finances and assets of the individual and the finances and assets of the company are completely separate. If the company is sued or unable to pay its debts, the owners are not liable for the debts.
What is unlimited liability?
The absence of any protection from liability for partners or proprietor’s personal assets is known as unlimited liability.
Generally, unlimited liability appears in sole proprietorship firms and partnership firms. Unlimited liability means that only the shareholders or the proprietor are liable for the loss. In this case, the proprietor or partners have no privileges.
Advantages of Limited Liability:
- Encourage investment
- Forbid the financial responsibility
- Protects the assets of the shareholders
- Gives a status called “separate legal entity”
- Easy to dissolute the company
Which type of company has limited liability?
The company’s name ends with the word “Limited”, for example- a private limited company and a public limited company has the privileges of limited liability benefits.
Also, it is applicable for One-Person companies and section 8 companies which are known as Non-Profit Companies, these all companies are registered under the Registrar of Company and governed by the Indian Companies Act.
Also, Limited Liability is suitable for a Limited Liability Partnership. It is registered under the Limited Liability Partnership Act, 2008 under the Ministry of Corporate Affairs.
When the limited liability is not applicable?
Directors or shareholders are not covered by limited liability if they give a personal guarantee or warranty for the debt or borrowing.
They cannot claim limited liability if the loss or liability was caused by the negligence of a director or shareholder.
Directors or shareholders or companies cannot claim limited liability if they have committed any fraud.
Now you would have understood more about this topic. Thanks for reading the entire Article. Keep sharing this article to your friends who are in business or about to start their own Business.