Limited Liability Companies

Usjes

Hi,

Can anyone explain to me the idea behind, and the limitations or obligations of a LLC ? My own vague understanding of the concept is that if you set up an LLC you benefit from the fact that should the company fail or be sued then your creditors or plaintiffs can only come after you for the company assets but your own personal wealth would be safe. To gain this benefit you must publish annual returns, (are there any other obligations?). I just find it hard to understand why this concept exists because it seems in essence a structure designed for the sole purpose of hiding assets from people who would otherwise have a claim on them. It also begs the question, why would anyone ever not set up a company as an LLC?
Also, what are the limitations of the LLC protection? To take an extreme example, if I dont like my neighbour I assume I cant just setup a 'Mike's Neighbourhood Cleaning' LLC and then acting on behalf of this LLC blow his head off and not be held accountable ? Yet I could design a faulty product which ends up killing someone and escape liability ? Is there a precise definition of what designation as an LLC can and cant shield one from ?
So, if anyone can shed any light on this concept or point me to some references explaining it, I'd be interested hear.

Thanks,

Usjes.

peteb2

LLC relates to America.
You can get charged with corporate manslaughter re your faulty products.

Usjes

peteb2 wrote: »

LLC relates to America.
You can get charged with corporate manslaughter re your faulty products.

The exact terminology may be different, but I'm sure we have the same concept of a 'Limited' company here in Ireland don't we, so the same questions apply ?
Why does it exist ?
What can it shield you from and what can't it ?
Why isn't every company a 'Limited' company if it offers you protection above a non-Limited company ?
What are your obligations as a 'Limited' company ?

Thanks,

Usjes.

Water John

Usjes Ltd is a separate legal entity to Usjes the person. The Company can be called anything in fact, that is acceptable to the CRO.
Usjes as a Director and Chairman of the Limited Company is not relieved of his criminal legal responsibilities.
Not a solicitor, just my understanding.
You draw a salary from the Co. and pay PAYE. The Co pays 12.5% Corporation Tax. IT thus can retain its net profit and grow the business.
This then can be sold or transferred as an entity in itself.

thejaguar

If I'm not mistaken a Limited Co. has to publish accounts. That would be one of the reasons not to go for it.

I assume there are other regulatory obligations, which all amount to a certain amount of extra overhead to deal with. So it's not just a simple question of becoming "Limited" on a whim.

I'm not an expert though, so I could be wrong.

Kings Inns or bust

Company Law 101 OP:

Two issues to consider Separate Legal Personality (Saloman v Saloman) and Limited Liability (inter alia Companies Act 2014)

SLP: Companies are entities in their own right, with right. For example a company can own assets.
LL: The directors and shareholders of companies have limited liability to the company's debts. There are a myriad of situations where the veil of SLP will be peirced and liability put on to the directors if they are, to use the technical legal term, 'acting the bollox'. Personally I think the law does not go far enough but LL is essential for modern business to function, it helps manage risk.

As for Criminal Responsibility there are a couple of tests the most easy to understand is the 'head and brains' test - R. v. P & O Ferries (Dover) Ltd.

Excellent questions OP.

Edit: To answer your other questions - the vast majority of companies are limited companies - either by shares or by guarantee. Generally if it's not a limited liability company then people don't incorporate - sole traders and alike.

hullaballoo

Caveat: I'm talking here about small business-type Ltd companies, rather than larger corporations with structured corporate governance and little or no crossover between shareholders and management.

There is no hiding assets from creditors. The Courts have broad powers to recover assets that have been taken out of a company for the purposes of depleting the funds available to the liquidator for the pari passu payment of creditors in an insolvent liquidation.

Company directors have vast duties that they must exercise to the best of their ability as well. The relationship between directors and companies is fiduciary in nature. There is the obligation to file accounts and keep proper records. Overall, there is a high level of formality to the ownership and management of a limited liability company that make it undesirable to people who know what's involved.

Unfortunately, many people set up companies on the incorrect basis that it means they can hide behind them, just as suggested here. When the reality of the situation comes to bear, it can be quite a shock. The mistake is easily made but it is a mistake.

My own thinking is that a company should only ever be set up where it is envisaged (and likely) that it will continue to exist and trade successfully beyond the career/lifetime of its "owners."

Water John

The level of accounting is not over onerous and would be done for Revenue any way. You are correct on the legal side. It's not a method of hiding any thing. The limited liability, available only on good faith and the lower tax rate on business profits are two advantages.
Yes it being a separate legal entity, it can be passed to a new generation or sold off.

Usjes

hullaballoo wrote: »

There is no hiding assets from creditors. The Courts have broad powers to recover assets that have been taken out of a company for the purposes of of depleting the funds available ....

My own thinking is that a company should only ever be set up where it is envisaged (and likely) that it will continue to exist and trade successfully beyond the career/lifetime of its "owners."

This touches on the points that are most interesting to me. An example may help clarify. Suppose someone inherited €10 million and had and used €1 million to set up a business. Suppose then that something went horribly wrong and the business ended up with a liability of €5 million. So I assume that in this case if the business was set up as
(i) A limited company, then you could only lose the €1 million invested in the company.
(ii) An unlimited company, then you could loose the full €5 million
Is this correct ?
Would this not be a very good reason for going for a limited structure, irrespective of whether or not you thought the business would outlive you ?
Note in this case the assets being 'hidden' from the creditors/claimants were never part of the company, yet, I assume in the un-limited scenario you would still loose them ?
Similarly, supposing the business traded successfully for many years and 90% of the profits were taken as salary by the owner because he had no plans to grow the business. Then a large liability suddenly arises. Would all this salary from previous years be safe from creditors/claimants or could this money be considered company 'assets' which had been 'hidden' that the courts might order be recovered to cover the new liability ?

So I am really interested in how safe assets, that are separated from the business from its inception, are, as opposed to the case of someone trying to extract and hide assets from the business after the liability has arisen. It seems that if a Limited company does indeed guarantee this separation then that is a very good reason to set up business on a limited rather than unlimited basis ?

The other interesting point to me is criminal vs. civil liability which Kings Inns or bust touched on. It sounds like a Limited structure wouldn't shield you at all from criminal liability assuming intent could be proven ?

peteb2

You say unlimited company but I presume you mean sole traders. Unlimited company is a different kettle of fish completely.