Unlimited Liability Means: Everything You Need to Know
Unlimited liability means business owners are responsible for their companies' debts. This is an important term in the business world because companies are likely to take on debt to continue operating.3 min read
2. The Foundation of Unlimited Liability
Unlimited liability means business owners are responsible for their companies' debts. This is an important term in the business world because companies are likely to take on debt to continue operating. Many businesses will borrow money for:
- New operations.
- Purchasing supplies and raw materials.
- Buying property or equipment.
The liabilities businesses face often fall into one of two categories:
- Current liabilities. These debts are considered short-term and are often paid off in less than a year.
- Long-term liabilities. Long-term liabilities will be paid off over time frames longer than one year.
Other terms you might hear when business owners talk about liability include.
- Term-limited, referring to a situation in which those responsible for repaying a debt can be limited in the amount of money they must pay back.
- Limited liability, referring to a legal situation in which business owners are only liable for the amount of money they put into the business. If the owner were to declare bankruptcy, he or she could be forced to pay the amount invested but will have most of his or her personal assets protected.
Many business owners choose to form limited liability companies to protect their personal assets from business debts and losses. Often, choosing a limited liability company (LLC) is the best of both worlds. Owners enjoy liability from debt while avoiding the double taxation that can come from forming your company as a corporate entity.
What Is Unlimited Liability?
The term unlimited liability means you could be exposed to losses that result from company debts. In this situation, the business owner can be held personally responsible for paying back business debts if the business were to run out of money. This can include the accumulations from debt made by the business or if the company were to lose a lawsuit and be forced to pay more damages than it can afford. Therefore, the business owners would be required to cover the debt.
Both limited partnerships and sole proprietorships face unlimited liability. Sole proprietors can be significantly at risk due to the fact that they are sole owners and do not have partners to offset their financial commitment. In an unlimited liability situation, any owner's personal assets can be seized to satisfy the debt.
Take, for example, a situation in which four individual owners working as partners each invest $50,000 into a business venture that they own jointly. During the course of the company's time in business, they accrue $275,000 in debt. If the company fails to pay these debts or defaults on its terms, the four partners must make equal payments to settle the business debts. Therefore, each owner will have to pay $18,750 out of his or her personal assets.
Another way in which unlimited liability can drastically affect business owners is if a company with unlimited liability is sued. Say a customer slipped and fell on your business property and sued for significant injuries. If the business does not have the assets to cover the amount for the injuries, then each of the partners would need to pay their portion of the debt from the lawsuit by selling off their personal assets.
To avoid the risks of unlimited liability and the problems it can cause business owners, many companies form as limited liability partnerships, companies, or corporations. When choosing one of these types of business entities, the owners and shareholders will be protected from their liability beyond what they invested in the company.
While there is no way to limit your liability completely when investing in a company, you can maximize your liability protection by choosing the right structure for your business. How much liability an owner will incur depends on how the business is organized.
The Foundation of Unlimited Liability
You will see most unlimited liability companies in jurisdictional areas where laws are based on English law. In the United Kingdom, companies will be formed or incorporated through registration under the Companies Act of 2006. Other countries where you are likely to see unlimited liability companies include:
- New Zealand
- Czech Republic
- Some jurisdictions in Canada
If you need help with what unlimited liability means, 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.