Can you always hide behind limited liability?
Management liability
When entering the entrepreneurial world and starting your own business, there are many legal aspects to consider, including the choice of business structure. One of the most common types of companies in Denmark is the private limited company (ApS), partly because this structure offers protection to owners in the form of limited liability.
Two key concepts that are important to understand and distinguish between as the owner of an ApS are management liability and limited liability. In this article, we will explore the difference between these two concepts and highlight their significance for those running an ApS.
Protecting personal assets
As previously mentioned, the ApS is a popular company structure, in part due to the protection of the owners’ personal assets. Limited liability means that the owners are typically only liable for the company’s debts to the extent of the capital they have invested in the company. This means that if the business faces financial difficulties or goes bankrupt, creditors can usually only claim payment from the company and not from the owners’ personal assets.
This protection is a critical difference compared to sole proprietorships or partnerships, where owners are personally, jointly, and severally liable for the company’s obligations.
Personal liability
It is, however, important to note that limited liability is not absolute. There are situations where owners who hold a board or director position in the company can incur personal liability. This can occur if the management has acted contrary to good corporate governance, misused the company structure to commit fraud, or otherwise acted in violation of the law. In such cases, management may be held personally liable for the company’s obligations.
It is the management’s duty to act in the best interests of the company. The management is responsible for steering and leading the company and making decisions in accordance with the company’s interests and the law. Management has certain corporate legal duties and responsibilities under the Companies Act, which must be observed in consideration of the company’s owners and stakeholders.
Liability for damages
The management’s liability in an ApS includes, among other things, supervising the company’s daily operations, finances, convening general meetings, maintaining accurate bookkeeping, complying with tax and duty regulations, and ensuring that the company adheres to all relevant legal and administrative requirements.
If a director or board member fails to fulfil their duties and responsibilities, their actions or omissions may result in personal liability. This could involve liability for damages towards the company, its creditors, or other stakeholders who suffer financial loss as a result of the management’s actions, omissions, or decisions.
Having a clear understanding of the difference between management liability and limited liability in an ApS is crucial to avoiding potential legal and financial pitfalls. This article provides an overview of the subject and does not replace professional legal advice.
We always recommend seeking legal advice and ensuring that thorough legal documents are prepared to address your specific situation and the applicable laws. In relation to this topic, it is generally advisable to review the company’s articles of association, director contracts, and internal rules of procedure to ensure these are in place and that the company operates in a structured manner.
By ensuring a solid legal foundation, you can create the best conditions for successful business operations and the protection of your interests.
Contact a specialist
Do you have questions about management responsibility and limited liability in a private limited company? Or if you have other commercial legal issues, you are more than welcome to contact us.
