Limited and Unlimited Liability

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What Does 'Liability' Mean?

Unlimited Liability

Limited Liability

What Does 'Liability' Mean?

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.

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.

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

Clearly, it is better to operate and unlimited liability company but this may not be possible when starting out due the formalities, time and cost involved in setting it up. Ideally all businesses should aim to achieve 'limited liability' status at some point so that they are able to protect their personal assets if they run into any difficulties.


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Posted in Business Entities, Business Law, Entrepreneur.