How does limited liability work?


It’s been recommended that I convert my sole trader business into a company limited by shares, because my personal assets will be protected by limited liability. I certainly like the sound of that! That being said, I’m a bit confused by how limited liability works. Can you please help me wrap my head round how having limited liability actually protects my personal finances? Thank you in advance for your help.



Company owners are only personally liable for the value of their shares or the financial guarantees they promise to the company. This money must be paid to the company if it is unable to pay its debts or it is wound up.

Shares usually have a nominal value of £1 each. You can issue any number of shares but you must issue at least one per shareholder. The liability of shareholders is, therefore, determined by the number and value of shares they hold in the company.

  • If you issue only one share in your company, your personal liability is limited to just £1.
  • If you issue 100 shares, your personal liability is £100. If your company has more than one shareholder, each shareholder is only liable for the number of shares they hold.

Most guarantees also have a nominal value of £1, so each guarantor is only personally liable to pay the value of their own guarantee.

The owners of unincorporated business structures - for example, sole traders - have unlimited liability, so they are personally liable for the full amount of any business debts.

2 years ago

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