Unlimited liability - What is unlimited liability?
In business, unlimited liability means that the owner(s) of a business are entirely responsible for its debts
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In contrast with limited liability businesses, unlimited liability refers to business owners who are personally liable for any debt their business might accrue. There is no maximum amount of debt that is capped, so any involved partners and owners are legally responsible for the full amount.
Unlimited liability vs. limited liability
Limited liability businesses are a popular business structure, as they allow sole traders, small business owners, and partners to add a level of protection to their fiscal responsibility behind the business.
By choosing a limited liability structure, a separate entity is created for the business itself, separating it from the personal accounts of the owners and/or partners. It serves to separate not only bank accounts but also assets as well as liabilities.
Unlimited liability means that any owners/shareholders share equal responsibility for debts in the case that a business fails or to settle any legal proceedings (for example, a lawsuit due to employee injury on the job). In the event of loss, any capital from the business would be seized, as could any personal assets that could contribute to covering the debt.
When a business faces unlimited liability
The reason that most have heard of a limited liability company (often referred to just as an ‘LLC’) is due to its popularity over unlimited liability as far as protection for the personal assets of the business owners and shareholders. Incorporation as an LLC means only the business capital and investments are at risk.
While it might seem like the obvious choice, there is one main reason that a company might choose instead to proceed as an unlimited liability company: there are no disclosure requirements. This means that there are public reports on the money coming into or flowing out of the business.
Many businesses are by default considered unlimited liability. Unincorporated businesses such as sole traders have unlimited liability. In other words, the individual who has started the business will be personally liable for business debts until they choose to incorporate. In the UK, a business can incorporate as a private unlimited company to maintain unlimited liability.