Unlike a sole trader business where the owner is personally liable for their business debts, a ‘veil of incorporation’ protects you from personal liability in most cases.

Taking on the role of director brings with it a range of responsibilities, however, and it’s important to understand these before acting. They include how you’d deal with conflicts of interest should they occur and the duty to act only within your powers as a director.

In addition to your legal duties, you also take on practical responsibilities, such as submitting accounts and returns and keeping proper records, which if you don’t meet, can lead to sanctions from HMRC and Companies House.

What are your legal duties as a company director?

The Companies Act, of 2006, sets out your legal duties as the director of a business. If any duties are breached, the fact that you’re the owner of a startup, and potentially inexperienced, doesn’t make a difference, as in taking on the office of director you’re expected to understand and meet your legal obligations at all times.

Under the Act of 2006, you have a duty to:

• Act within your powers
• Promote the success of the company
• Exercise independent judgement
• Exercise reasonable care, skill, and diligence
• Avoid conflicts of interest
• Not accept benefits from third parties

Acting within your powers

Your powers should be laid out in the company’s constitution (Articles of Association), the key takeaway being you must use your powers only for the benefit of the company as a whole rather than for yourself as a director.

Promoting the success of the company

When promoting the success of the company, you must consider all shareholders and business stakeholders when making decisions. Initially, the stakeholders involved with your startup are likely to include suppliers, members of staff, and customers or clients.

Exercising independent judgement

Using independent judgement as a director means you won’t be swayed by others who may want to take some control of the company, whether individually or as a group – for example, a cohort of shareholders acting together.

Exercising reasonable care, skill, and diligence

As a startup director, your level of skill in running the company may be limited and this could be taken into account if you’re accused of breaching your duties in what is known as an ‘objective’ test. If you have specific knowledge in an area of business, however, such as accountancy, a breach of duty may be determined through a ‘subjective’ test that takes your expertise into account.

Avoiding conflicts of interest

Conflicts of interest commonly occur for directors, but you don’t have to completely avoid them. As long as you declare the conflict and ensure the board sanctions any further actions, you may meet your legal duty in this area.

Not accepting benefits from third parties

There can be a fine line between promoting the success of the company by developing good business relationships and being seen as accepting benefits from third parties. For this reason, it’s a good idea to lay out exactly what is acceptable in this respect in a written document.

What happens if you breach your director's legal duties?

Failing to meet your legal responsibilities as a startup company director can lead to serious ramifications, including director disqualification and having to personally repay any financial loss the company incurred.

Your legal responsibilities cover a broad range of business areas and address potential issues that could derail your business plans. In general terms, it’s advisable to approach directorship with the intention to unfailingly act with integrity and good faith and to quickly report and seek advice in any situations that could potentially lead to a breach.