Breaking Down Limited Liability: What You Need to Know to Protect Your Business!

When starting a company, one of the most important considerations is the issue of liability. Keep reading this Business Kitz blog to learn more!

What is liability?

Put simply, liability refers to the legal responsibility that a business owner or individuals has for any damages or losses that occur as a result of their actions or inactions. Liability is a key concern for entrepreneurs, as it can have a significant impact on their personal finance, assets, and overall reputation.

Further information about companies, and limited liability, can be found on the BusinessGov website, but we can give you the rundown.

How to limit liability?

One way business owners can limit their liability is by forming a limited liability company (LLC). An LLC is a legal entity that is seperate from its owners, meaning that the business itself can be sued or held liable for any damages of losses, rater than the individual owners.

In Australia, the process of forming a limited liability company (LLC) is known as registering a proprietary limited company (Pty Ltd). Here are the general steps involved:

1. Choose a name for your company: Choose a unique name that complies with the Australian Securities and Investments Commission’s (ASIC) naming requirements. You can search for available names on the ASIC website.
2. Register your company: Submit an application for registration to ASIC, along with the required documents and fees. This can be done online or by mail.
3. Obtain necessary licenses and permits: Depending on your business type and location, you may need to obtain various licenses and permits to operate legally. This may include local business licenses, state-specific permits, and federal tax IDs.
4. Draft a shareholders agreement: A shareholders agreement outlines the rights and responsibilities of the company’s shareholders. It is not a legal requirement, but is recommended to avoid misunderstandings and disputes among shareholders.
5. Comply with tax and other regulatory requirements: Companies must comply with various tax and regulatory requirements, such as filing income tax returns, paying GST (Goods and Services Tax), and maintaining accurate financial records.
6. File annual reports: Companies must file an annual statement with ASIC each year, which includes information about the company’s directors, shareholders, and financial statements.

Advantages of being a limited liability company

The main advantage of an LLC is that it provides protection for the personal assets of the business owners. In the event that the business is sued or incurs debts, the owners’ personal assets, such as their homes, cars, and savings accounts, are generally protected from seizure or liquidation. This means that if the business is unable to pay its debts or obligations, the owners are not personally responsible for those debts.

In addition to protecting personal assets, forming an LLC can also offer tax advantages. LLCs are not taxed as a separate entity, like a corporation, but rather as a pass-through entity. This means that the profits and losses of the business are passed through to the individual owners and are taxed as personal income, rather than being subject to corporate tax rates.

Lastly, forming an LLC provides flexibility in terms of ownership structure and management. LLCs can be owned by one or more individuals, known as members, who have the ability to manage the business themselves or hire a separate management team.

Disadvantages of limited liability

Despite these benefits, it is important to note that forming an LLC does not offer complete protection from liability. There are certain situations in which an individual owner can be held personally liable for the actions of the business, such as if they engage in fraudulent or illegal activities or if they personally guarantee a business loan.

Other disadvantages of limited liability:

1. Limited liability can create a moral hazard, where business owners may take greater risks than they would if they were personally liable for the business’s debts and obligations.
2. Limited liability can make it more difficult for creditors to recover debts owed to them, as they are unable to go after the personal assets of the business owners.
3. Limited liability can lead to an uneven distribution of risk, as those who invest in or work for the business may be left with the consequences of the business’s failures, while the owners are shielded from personal liability.

How to manage liability complaints

Managing liability complaints is a complex process that requires careful consideration and attention. The first step is to take the complaint seriously and gather all relevant information. Then, assess the situation by evaluating the merits of the complaint and determining the potential liability. Respond to the complainant promptly and courteously, acknowledging their concerns and explaining your position. Take corrective action if necessary and seek legal advice if the complaint involves potential legal liability. Finally, follow up with the complainant to ensure that the issue has been resolved to their satisfaction and keep a record of the complaint and your response for future reference.

By responding promptly, investigating thoroughly, and taking appropriate action, you can minimise the risk of legal liability and maintain a positive reputation for your business.

Your responsibilities as a limited liability company

Firstly, LLC’s must comply with state laws where they are registered, which includes filing annual reports and paying necessary fees. Secondly, they must maintain accurate financial records of their transactions to ensure transparency and accountability. Furthermore, LLCs are legally bound to fulfill their contractual obligations with customers, vendors, and other business partners. Finally, LLCs are responsible for protecting their intellectual property, such as trademarks, patents, and copyrights. By fulfilling these responsibilities, LLCs can maintain their legal and ethical obligations and ensure the smooth operation of their business.

Legal advice

Understanding your rights and responsibilities as a limited liability company may be difficult, particularly when starting a company. Check out our Business Kitz Subscription Service today to access our full range of legal, commercial and employment documents to begin your business with a solid foundation that ensures compliance. If you are unsure about how to best protect yourself and your future business, our sister company, Legal Kitz can assist you. Additionally, you can request a FREE consultation with one of their highly experienced solicitors here today, or contact them at info@legalkitz.com.au or 1300 988 954.