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What Type of Liability Do Private Companies Have?

What Type of Liability Do Private Companies Have?

Running a private company? Not sure how liability works? Find out what you need to know here about how the concept of liability will impact you here.

5th April 2019
Reading Time: 2 minutes

You may know that different types of businesses have different liabilities in regards to their financial obligations. Furthermore, you may also have heard that a benefit of incorporating a business is gaining the protection of limited liability. However, you may be unsure of what this all means. Keep reading to find out the essential information about a private company’s liability.

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What is Liability?

Liability refers to who is legally responsible for something. In relation to business, liability usually refers to who is responsible for the debts or costs of running your business. Government taxes, contracts or a successful tort claim against your business can give rise to a liability for your business. Usually, your liabilities are just part of the everyday running of your business. However, occasionally who exactly is responsible for your business’s obligations can have a significant impact upon your life.

What Type Do Private Companies Have?

A company as opposed to a partnership or sole trader, enjoy limited liability for their obligations. This means that the owners of companies are usually not legally responsible for the debts of their businesses. Therefore, if a company becomes insolvent or goes into liquidation, the owners, whom are the shareholders, do not have to contribute their personal finances to pay debtors of the business. Limited liability protects owners of a business as the company is its own legal entity. Remember that while limited liability protects owners from legal and financial obligations, it provides no protection from reputational damage that occurs from the insolvency or liquidation of a business.

Can Limited Liability Be Excluded?

Limited liability will not protect directors and owners being personally liable in all situations. Directors are required to act with care and diligence to ensure that they run the business in line with the standards of a reasonable person. Furthermore, there also is a positive duty to avoid insolvency, so directors cannot deliberately avoid managing the firm’s financial obligations. Directors are also required to act in good faith, and make sure their decisions for the company is in the company’s interests rather than their own personal interests.

If a director breaches their duties, they risk becoming personally liable for the company’s debts if it becomes insolvent. However, if you act ethically and responsible in the running of your business, you should not have to worry about being personally responsible for your company’s debts.

Conclusion

Therefore, you can see that the type of liability private companies enjoy serves to protect their owners. If you want to know more about liability, or what it exactly means to your business get in touch with a company lawyer today.

Unsure where to start? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.

Author
Lachlan Ward

Lachlan is an intern at Lawpath as part of the content team. He is currently studying a Juris Doctor at the University of Sydney. Lachlan has a keen interest in corporate law and commercial litigation.