Well, not quite! A simplistic view is that all you need to do is ensure that you meet your statutory obligations, not sign any overly onerous contracts and meet your commitments in those that you do sign and all will be fine. And that's quite right, though just achieving those three things in a startup with limited resources can be challenging!
This cheery blog focusses on what could happen if you get things really wrong...to ensure you are informed of the risks and remain diligent, rather than scare you needlessly.
This list is certainly not exhaustive but aims to provide an understand the range of areas that create risk, despite having 'limited liability'.
The list also doesn't cover areas of risk for the company itself, but just the items that can potentially “pierce the corporate veil” and impact you personally:
Personal Guarantees. Technically, this isn't piercing the corporate veil at all - it is director(s) signing up to PGs which mean that their personal wealth is at risk if the business defaults on its obligations. Typically, these would be applied by banks if the business takes a loan - the banks will want to know you are personally 'on the hook' for the debt if the business can't repay.
If a director has personally committed an environmental offence during the course of business, or caused it to occur with their consent or negligence, they can be held personally liable.
Not complying with HR legislation. This should only apply if you have employees, of course, but HR legislation carries serious penalties. As an example, if a tribunal finds your business guilty of discrimination then there is no limit on the compensation they can award. We strongly recommend engaging a HR partner to ensure that you are following the relevant rules, regulations and best practice. For example, did you know it's illegal to not have a H&S policy if you have 5 or more employees?
Inducing your company to breach a contract can sometimes allow a court to determine that its directors are personally responsible.
Misfeasance - breaching your fiduciary duties as a director may result in creditors or shareholders being able to pursue you personally for your actions as a director.
Healthy and safety offences - this can have very serious consequences for the company and its directors– potentially, unlimited fines and/or 2 years in prison.
Breaching GDPR. This sounds innocuous enough, but the Information Commissioner’s Office can leverage a fine of £500,000 against directors personally.
Accidentally claimed Corona furlough payments? Again, a potential significant problem for directors personally.
Employment law is also littered with examples of court rulings finding directors personally liable for their actions. Specific areas of risk include breach of contract and whistleblower protection
Trading without statutory minimum insurances.
Insolvency issues - a misstep here could see you personally liable for company debts.
Accounting Records Failures - much more serious than it sounds.
You will not be surprised to hear that you can also go to jail for cheating HMRC on VAT, PAYE and NIC.
Price fixing and cartel type behaviour can result in a custodial sentence too.
Courts have wide ranging powers in respect of fraud and bribery, as you'd imagine.
If things go catastrophically wrong then you are at risk of one, several or all of the following occurring:
As warned above, this isn't cheery stuff - sorry!
There are a number of things that founders can do to help to mitigate the risks:
Identify what your legal obligations are when running your type of business and make sure you comply with them.
Furthermore, if you work in a regulated industry ensure that you are aware of the Code of Conduct that applies specifically via that sector (see, for example, the FCA action against the CEO of Barclays here).
Don't agree to anything that means you are giving personal guarantees (PGs) unless you really need to. This is a really good reason why most start-ups dismiss bank debt as an early funding option - bank loans and overdrafts will often only be given with PGs.
Make sure all contracts / agreements / deeds: 4. Are signed in your capacity as a Director of your company rather than you as an individual. Your shareholders’ agreement and founder service agreement will be an exception to this, of course. 4. Don't include any clauses that make you 'joint and several' with the company - this means that people can treat you as liable as the company for any debt. 5. Are reasonable and not overly onerous.
Ensure you adhere to any investor consents / reserved matters detailed in your shareholders’ agreement.
Ensure you are aware of your fiduciary duties as a director, and act accordingly.
Being aware of the risk of trading whilst insolvent.
Even if / when you leave the company, be aware that you may have enduring obligations. These will likely spread across any employment / founder service agreement, IP assignment, shareholders agreement and others.
There are some other risk mitigation strategies you may wish to consider:
← Back to all of the articles
You can start a funding round in minutes with a free FounderCatalyst account, experiment with our service and see how easy it would be to save time, money, and emotional resources by using FounderCatalyst when raising your next funding round.
You can see a sample of the paperwork we'd generate, invite colleagues to act as investors, and truly experiment with how easy we make it. Then cancel the experiment round when you're ready to start a real one!