Limited liability versus personal liability – the basic differences

On the Choice of Form of Liability

This article sheds light on personal and limited liability, which also refers to the relevant company forms (ApS, IVS, A/S, Sole proprietorship, I/S, etc.) that are linked to the two types of liability. In this article, we do not give an unambiguous answer to whether you should choose one or the other.

In connection with starting a business, many considerations are made. The goal of founding a business is with earnings and profits in mind; But should you still find that things do not go as expected, it is good to know what obligations you incur as a founder of a company.

This question is related to the form of business and the liability associated with it. There are different types of business. These include the most well-known: the sole proprietorship, the private limited company, the limited liability company, and the entrepreneurial company (the latter is currently being wound up in Denmark). The choice of business form has an impact on how the partner is liable to the company’s creditors in the event of bankruptcy. The sole proprietorship is linked to the personal liability and to the private limited company, the limited liability company, and the entrepreneurial company are linked to the limited liability.

Personal Liability (Including Sole Proprietorship)

The sole proprietorship is a very common and popular form of business. This is because it is extremely easy to set up, it does not require a capital injection and you do not have to pay a registration fee to the Danish Business Authority.

The sole proprietorship requires that the business is personally owned by one owner, and you therefore become a private owner as the founder of the company. Connected to the personal ownership is the personal liability. This means that the owner is liable (personally and unlimitedly) for all the company’s obligations with his or her personal finances. Private finances are understood to mean the owner’s own personal assets, which you are liable for. Thus, the company’s finances and the owner’s own finances do not differ from each other in light of personal liability.

As a private individual and owner of a sole proprietorship, you must therefore make up your mind whether you can and will stand up for any obligations that the company may impose on itself as part of the operation. Roughly speaking, you must be prepared to throw all your belongings into the pool before setting up a sole proprietorship, as you are liable with everything you own and have. The creditors can thus obtain the right to the owner’s house, the owner’s car, the owner’s boat or similar assets of value if things go wrong.

Limited Liability (Including Ownership of Private Limited Companies, etc.)

In contrast to personal liability is limited liability. This applies to private limited companies, limited liability companies and entrepreneurial companies, where none of the shareholders, shareholders or owner of the company is personally liable. In these types of companies, starting a business in the form of a company requires a capital contribution. The capital requirement for a private limited company is DKK 40,000, for a public limited company of DKK 400,000 and for an entrepreneurial company of between DKK 1 and DKK 39,999 (however, it is not possible to set up an IVS at the time of writing). The person or persons who contribute this initial capital is called a partner, and it follows from the legislation that the partner is generally not personally liable for any debts that the company may incur in its operations.

In connection with the limited liability, the capital contribution is to be understood as the sum of money that the partner may be unfortunate to lose if the company were to go bankrupt. This means that in connection with a private limited company, the partners in principle only provide security for DKK 40,000 out of their own pocket to the creditors. The liability is thus limited to the contribution of DKK 40,000 and DKK 400,000 respectively from the private limited company and the limited liability company. In the case of the entrepreneurial company, the liability depends on the chosen capital contribution.

Limitations

The limited liability is in many ways reserved for only being theoretical in these times. In the scenario where a newly created company needs capital to bring its ideas to life. This capital must be found with lenders, who will often take the form of a financial institution. The bank wants a form of collateral where it is usually desirable (perhaps even required) that the owner provides a personal guarantee for the loan. In this way, the owner will still be liable as guarantor for the obligation entered into on behalf of the company. Thus, the limited liability comes to resemble the personal liability fsva. the bank’s lending to the company.

Furthermore, one must not think that one can just do as one pleases because the liability is limited. To the extent that you are a member of the management of the same company, you can still incur management liability towards the company, its creditors and others who may suffer losses as a result of the management’s business conduct. In this connection, it may be relevant to consider whether you should take out managerial liability insurance, which you can read more about here.