Unlimited Liabilities Definition: Everything You Need to Know
The unlimited liabilities definition is a business where all owners share responsibility for the business's debt and liabilities. 3 min read
2. Unlimited Liability in the U.S.
3. Limited Liability
The unlimited liabilities definition is a business where all owners share responsibility for the business's debt and liabilities. Like the name implies, unlimited liability doesn't have a limit and can be paid by seizing the personal assets of the owners, which sets it apart from a limited liability business.
Unlimited liability is usually part of a general partnership or sole proprietorship. With this agreement, each of the business owners holds equal responsibility for any debt the business incurs. This also means that the personal assets and finances of the business owners can be taken if the business can't repay its debt. Most companies choose to be established as limited partnerships rather than putting their personal assets at risk with unlimited liability. With unlimited liability, the business owners are exposed to any loses that come from the company's obligations.
One of the biggest problems with unlimited liability is lawsuits. An example of this is if a customer gets hurt while shopping in a store, they could sue the business. If the business doesn't have enough money to cover the legal fees and settlement costs, the customer can then sue the business partners themselves. If the partners can't cover the costs, the court can order the partners to sell their personal assets to pay the debt.
Unlimited liability involves risk and is not the preferred option for most business owners. For this reason, most partnerships are organized as limited liability companies or limited liability partnerships, which offer liability protection to business owners. Unlimited liability isn't very common, but it can be a good option for a business that only holds lands or investments and doesn't sell goods or services.
Basis of Unlimited Liability
Although unlimited liability isn't very common, it is most typically found in places that base company law on English law. Unlimited liability companies in the UK are formed according to the Companies Act of 2006. Companies are also created according to English law in the following countries:
- New Zealand
- Czech Republic
- parts of Canada
It may seem like unlimited liability companies can be formed in a lot of countries, but they are still rather uncommon because of the harsh burden that is placed on the owners to fill in for the business debt.
Nondisclosure is a benefit offered by unlimited liability. In 2015, online craft marketplace Etsy established an Irish subsidiary organized with unlimited liability. This means that the company isn't required to give public reports or disclose the money and taxes the company funnels through Ireland.
Unlimited Liability in the U.S.
Companies in the United States can operate as joint-stock companies (JSCs), which are similar to unlimited liabilities. JSCs function according to associations in states including New York and Texas, where they follow the Texas Joint-Stock Company/Revocable Living Trust model. A JSC is different than a partnership because it doesn't offer limited liability to shareholders. It is formed by a special contract to establish a unique entity, and a shareholder isn't allowed to constrain another shareholder with liability because each party holds equal responsibility.
Unlike unlimited liability organizations, corporations are created to give shareholders limited liability. This means that if the company goes into debt and can't make its payments, the partners don't have to pay the debt using their personal assets. The only way shareholders in a corporation can lose money is if they invest in the stock and it doesn't perform well. Although all investments come with some form of liability, the structures of corporations and LLCs aim to increase liability protection.
Limited liability can also refer to a company where the parties responsible for paying off a debt are limited in the amount of money they owe.
The term can also mean a legal arrangement that makes business owners only financially responsible for matching the amount of money they have personally contributed to the business. If a small business owner creates a company with limited liability and the company eventually goes bankrupt, the owner is only personally responsible for covering the amount of money he originally contributed to the business, not the total amount the company lost.
If you need help with unlimited liabilities definition, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.