When a business is incorporated as a private company, it could be a limited liability company or unlimited liability company.
Limited Liability Company
As the name implies, the liability of the business and its promoters are limited. In a company limited by shares, the liabilities of the members to offset the debt of the company on its winding up are only to the shares in the business and the unpaid shares held by the members in the business.
Unlimited Liability Company
Unlike the Limited liability company, the liabilities of the company are also the liabilities of the shareholders. In other was, the liability of the members to contribute to the assets and liabilities of the business are unlimited. Therefore, their personal assets can be used to offset the debt of the company where the business couldn’t offset its debt.
What Gives a Business Opportunity to Enjoy Limited Liability?
For a business to enjoy limited liability, it has to be incorporated as a private company limited by shares (limited liability company). It is important to incorporate a business as a limited liability company even when the business has single shareholder (sole proprietor).
Benefits of Limited Liability Company
When a business is registered as a limited liability company, it enjoys the following benefits:
Legal Entity
Section 37 of CAMA 2020 gives an incorporated company a separate legal name. Once a business is incorporated, it acquires separate legal personality different from the owners. The law recognizes it as a person that can conduct business like human — it can operate bank account and transactions, apply, enter and execute business contractions in its name distinct from the names of the shareholders.
Limited Liability
It is one of the outstanding benefits of limited liability company. As the name implies, the shareholders will only be liable for the debts of the business to the extent of the unpaid part of their shareholding in the business. The loss of the shareholders in the business will only be their shares at stake in the business. The debts of the company can only be paid with its assets even in the case of winding up, personal assets of the shareholders can not be used.
Perpetual Succession
A limited liability company has a perpetual succession. It means that company can never die, shareholders, employees can come and go but the business remains. An incorporated company can never die but can be killed through legal process of winding up. Unincorporated business dies at soon as the proprietors or one of the proprietors dies.
Legal Action
Having acquired separate legal personality, it can sue and be sued in the court of law in its name. Any judgement obtained against it will be executed against its own assets not that of the shareholders.
Right to Own Property
As a legal entity, it can acquire, hold and sell property in its own name.
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