It is crucial to understand the difference between ‘Unlimited and Limited Liability’ companies as this can have a significant impact on costs if something goes wrong.
Definition
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 business owners are fully responsible (liable) for all business debts if it fails. Business owners have a legal obligation to repay, in full, the financial obligations of their companies. The business owner’s personal assets will be used if the business does not have enough money to pay what it owes. This may include personal property, vehicles, and any other assets held by the business owners.
Limited Liability
This usually refers to Limited Liability Companies (LLCs) and Corporations. With this structure, the owner’s responsibility to repay the financial obligations of their business is limited to the assets available in the business. This is an important reason why it is advisable for a business to have limited liability.
Owners and shareholders are not responsible for all of the business debts if it fails. But this does not mean business owners are not liable for any of their business debts. Shareholders’ and business owners’ risk is limited to the investments they have made in the business.
Why don’t businesses have limited liability?
The formalities, time, and cost involved in setting up a limited liability company mean that it may not be practical to start a business with this structure. However, all business owners should aim to achieve limited liability status so that they can protect their personal assets if they run into any difficulties.
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