What Does It Mean to Be a Director of a Limited Company?
Before you take the leap into setting up a Limited Company and becoming a Director of the company you should make sure that you are aware of the Director’s responsibilities. These are legal duties that you have as a Director of a company that you would not have in the same way if you are acting as a sole trader. These can be onerous and you are legally responsible to meet them.
There are benefits of trading through a limited company but you need to be aware of the additional obligations and make sure you can meet them. These should not be ignored or taken lightly. While the penalties for failing to meet these responsibilities are more serious if your company is a listed company where shares are traded on the open market, they are still important for Limited Companies where you may be the sole owner and director.
The law requires that directors act in the interests of their company and not in the interests of other parties. If you are a sole director/shareholder you must not put your interests above those of the company. This includes things like withdrawing money from the company for yourself so you cannot pay the tax or loans that the company owes.
These Director’s responsibilities go above and beyond the standard duties to complete annual company accounts and tax returns and to complete the confirmation statement each year.
Key Director Responsibilities Under the Companies Act
In the Companies Act there are seven statutory directors’ duties. These are:.
Duty to Act Within Their Powers
As a company director, you must act only in accordance with the company’s constitution, and must only exercise your powers for the purposes for which they were conferred.
Duty to Promote the Success of the Company
You must act in such a way that you feel would be most likely to promote the success of the company (i.e. its long-term increase in value), for the benefit of its members as a whole. However, you must also consider a number of other factors, including:
- the likely long-term consequences of any decision
- the interests of company employees
- fostering the company’s business relationships with suppliers, customers and others
- the impact of operations on the community and environment
- maintaining a reputation for high standards of business conduct
- the need to act fairly as between members of the company.
Duty to Exercise Independent Judgment
You have an obligation to exercise independent judgment. This duty is not infringed by acting in accordance with an agreement entered into by the company which restricts the future exercise of discretion by its directors, or by acting in a way which is authorised by the company’s constitution.
Duty to Exercise Reasonable Care, Skill, and Diligence
You must exercise reasonable care, skill and diligence using your own general knowledge, skill and experience (subjective), together with the care, skill and diligence which may reasonably be expected of a person who is carrying out the functions of a director (objective). So a director with significant experience must exercise the appropriate level of diligence in executing their duties, in line with their higher level of expertise.
Duty to Avoid Conflicts of Interest
This dictates that, as a director, you must avoid a situation in which you have, or may have, a direct or indirect interest which conflicts, or could conflict, with the interests of the company.
This duty applies in particular to a transaction entered into between you and a third party, in relation to the exploitation of any property, information or opportunity. It does not apply to a conflict of interest which arises in relation to a transaction or arrangement with the company itself.
This clarifies the previous conflict of interest provisions, and makes it easier for directors to enter into transactions with third parties by allowing directors not subject to any conflict on the board to authorise them, as long as certain requirements are met.
Duty Not to Accept Benefits from Third Parties
Building on the established principle that you must not make a secret profit as a result of being a director, this duty states that you must not accept any benefit from a third party (whether monetary or otherwise) which has been conferred because of the fact that you are a director, or as a consequence of taking, or not taking, a particular action as a director.
This duty applies unless the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
Duty to Declare Interest in a Proposed Transaction
Any company director who has either a direct or an indirect interest in a proposed transaction or arrangement with the company must declare the ‘nature and extent’ of that interest to the other directors, before the company enters into the transaction or arrangement. A further declaration is required if this information later proves to be, or becomes either incomplete or inaccurate.
The requirement to make a disclosure also applies where directors ‘ought reasonably to be aware of any such conflicting interest.
However, the requirement does not apply where the interest cannot reasonably be regarded as likely to give rise to a conflict of interest, or where other directors are already aware (or ‘ought reasonably to be aware’) of the interest.
Common Penalties and Enforcement for Directors
A case for failing to meet these duties can only be brought under common law. This means that in sole director/shareholder companies no action is likely to be brought against a director that fails to meet the legal obligations as they would be bringing it against themselves. That is unless the company goes into liquidation, in which case the liquidator can claim against the director if they find that they have failed to protect the interests of the company. This is why it is very important to not take on debt that you are unsure that you will be able to repay.
Read more: How to close down a Limited Company
Director’s Responsibilities to Stay Compliant
Monitoring Finances and Avoiding Debt
One of the most important aspects of being a director is maintaining a clear view of your company’s financial health. Regularly reviewing your profit and loss statements, balance sheets, and cash flow ensures you’re aware of the company’s financial position. This is especially important when taking on new debt or making financial commitments. Always avoid taking on liabilities the company cannot reasonably repay, as directors can be held personally liable if the company goes into liquidation. Staying on top of your finances not only protects your business but also demonstrates due diligence in your responsibilities.
Read more: Financial Confidence Guide £20
Understanding Your Company’s Constitution
Every limited company operates under a set of rules outlined in its constitution, usually found in the Articles of Association. As a director, it’s your responsibility to understand and adhere to these rules, as they dictate how decisions can be made, how profits are distributed, and what actions are within your authority. Acting outside the scope of your constitution can lead to legal challenges, so ensure you’re familiar with its contents. If in doubt, seek clarity before making decisions to avoid any potential breaches.
Seeking Expert Advice
Director’s responsibilities can be complex, and no one expects you to navigate it all alone. Seeking advice from professionals, such as accountants, solicitors, or financial advisors, can help you make informed decisions and stay compliant. These experts can provide insights into your company’s obligations, help you manage risk, and ensure you meet legal requirements like filing annual accounts and paying taxes. Working with professionals doesn’t just ensure compliance – it gives you peace of mind to focus on growing your business.
Have questions about setting up a limited company or director responsibilities? Contact us today for expert guidance.
