Limited and Unlimited Liability – Business Law Series – Business Entities

Before we continue with the remaining business entities it is important to understand what is meant by the terms, 'Unlimited and Limited Liability.

Liability means that someone is legally responsible for the debts or actions of the business.

Unlimited Liability

This usually refers to Sole Proprietors and Partnerships where the business owners are fully responsible (liable) for the businesses debts if it fails. This means that if the business does not have sufficient funds to pay what it owes then the business owners personal assets can be used to pay off the business debts. This may include personal property, vehicles and any other assets held by the business owners.

Limited Liability

This usually refers to Limited Liability Companies and Corporations.  It means that the business owners or shareholders are not responsible for all of the business debts if it fails.

Sole proprietors and general partners have unlimited liability. Corporate shareholders only risk their investment.

Limited liability in general means that the liability of a business owner is limited to the amount that the owner has invested in the company. Common misunderstanding assumes that limited liability means that business owners are not liable for anything that happens in the business, but this is not true.

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