When business owners are looking to establish their business, there are a number of different business structures they can consider. One of the most common business structures is a limited liability company. Operating a business using this structure is a common practice and has a number of advantages, such as:

  • its usefulness for growth;
  • promoting the legitimacy of the business; and 
  • providing for certain tax benefits. 

However, the most distinguishing characteristic of a limited liability company is that the company is a separate legal entity from its owners and the company itself is responsible for performing its obligations. This means its owners do not take on those liabilities personally. This article explains the:

  • characteristics of a limited liability company;
  • other types of companies in New Zealand; and
  • extent that directors and shareholders are responsible for the liabilities of a limited liability company.

What Is a Company?

A company is a type of legal entity. Importantly, it is a separate legal entity from its owners and managers. It can take many of the actions that an individual can take, such as: 

  • entering into contracts;
  • providing services; 
  • suing others; and 
  • being sued itself.

Limited Liability Companies

A limited liability company is the most common type of company. It is called a ‘limited liability’ company because the liability of the shareholders on behalf of the company is limited. This means that the company is responsible for its own liabilities and its shareholders do not take on any company debts personally. This protects their personal assets.

For example, if a creditor makes a claim against a limited liability company, if that company cannot satisfy that claim out of its own assets, the creditor will not be able to take action against the company’s shareholders personally. This is unless those shareholders have provided personal guarantees to that creditor.

Limited liability companies are the most common type of company structure. This is because they limit the personal risk incurred by people when running a business. This limitation of risk promotes business activity and grows the economy. 

A limited liability company can be identified by the ‘Limited’, ‘Ltd’, or ‘Tapui’ (limited) at the end of its name.

Other Types of Companies

There are two other types of companies in New Zealand:

  • co-operative companies; and
  • unlimited companies.

Co-operative Companies

A co-operative company is a type of limited liability company that:

  • supports its shareholders; or
  • promotes a specific purpose or social cause.

A requirement of a co-op company is that at least 60% of its shareholders must commercially transact with the company.

For example, this includes by supplying services to the company or purchasing goods from the company.

The co-op’s constitution must also describe the purpose or cause which the co-op is promoting. You must file the constitution with the Companies Office.

Unlimited Companies

Unlimited companies are companies where the liability of shareholders on behalf of the company is unlimited. This means that if a creditor makes a claim against an unlimited company, if that company cannot satisfy that claim out of its own assets, the creditor will be able to take action against the company’s shareholders personally.

Unlimited companies are very rare because of the personal risk taken on by the shareholders and are generally only established to meet very specific, often foreign, legal requirements.

Directors and Shareholders of Limited Liability Companies

The two key parties involved in a limited liability company are:

  • directors; and
  • shareholders.

Directors are the people who have been appointed to manage the company’s business and affairs. Shareholders are the owners of the company and who have contributed capital to the company.

Directors are generally not personally liable on behalf of the companies except if they have:

  • breached their directors’ duties; or
  • provided personal guarantees to lenders or creditors.

Shareholders are also generally only liable for:

  • money they owe on their shares; and
  • personal guarantees they have provided to lenders or creditors.

Key Takeaways

Limited liability companies are the most common type of companies used in New Zealand to operate businesses. The company is itself responsible for its liabilities meaning that for the owners of the company, operating the business is much less risky for them personally than it otherwise would be. If you’re a startup with growth ambitions, it will be necessary for you to establish this kind of business structure to protect yourself and to grow your business. If you have any questions about limited liability companies or would like assistance with setting one up, contact our LegalVision’s New Zealand business lawyers on 0800 005 570 or by filling in the form on this page.

FAQs

What is a limited liability company?

A limited liability company is a business structure where the company is responsible for its own liabilities and its shareholders do not take on those liabilities personally.

What is the most common type of company structure?

Limited liability companies are the most common type of company structure used. This is because they limit the personal risk incurred by people when running a business. This limitation of risk promotes business activity and grows the economy.

What is an unlimited company?

Unlimited companies are companies where the liability of shareholders on behalf of the company is unlimited. This means that if a creditor makes a claim against an unlimited company, if that company cannot satisfy that claim out of its own assets, the creditor will be able to take action against the company’s shareholders personally. 

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. For just $199 per month, membership unlocks unlimited legal consultations, faster turnaround times, free legal templates and members-only discounts.

Learn more about LVConnect

Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

Our Awards
  • 2019 Top 25 Startups - LinkedIn 2019 Top 25 Startups - LinkedIn
  • 2020 Fastest Growing Law Firm - Financial Times APAC 500 2020 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 Law Firm of the Year Finalist - Australasian Law Awards 2020 Law Firm of the Year Finalist - Australasian Law Awards
  • Most Innovative Law Firm - 2019 Australasian Lawyer 2019 Most Innovative Firm - Australasian Lawyer