What is unlimited liability?
When joint owners of a business are mutually responsible for the company’s debt and liabilities and the liability isn’t capped, this is known as a unlimited liability business.
Liability occurs when the entire business has a legal responsibility to come up with the funds in compliance with court requirements, expenses and third party contracts.
This liability can be paid off through the release of money from the business owners’ personal assets, as opposed to a limited liability business where personal assets are protected.
For this reason, many companies choose to form limited partnerships instead of taking the risk against their personal assets which can be seen as too much of a financial burden, especially if a company faces liquidation.
In the UK, unlimited liability companies are created under the Companies Act of 2006.
What are the advantages of unlimited liability in business?
- More freedom – there are usually less compliance regulations to adhere to with unlimited liability
- Potential tax savings – depending on the level of profit, there could be some tax advantages to having unlimited liability using non-disclosure
What are the disadvantages of unlimited liability in business?
- Your personal assets are at risk if the business sees high levels of liability. This is could be especially stressful if you have dependents to support
- Securing a loan could be more difficult due to the increased risk
Unlimited liability for debts
In most business partnerships the partners all have unlimited liability and so are personally liable for any business debts.
In a sole proprietorship business the one individual – known as the sole proprietor – has the entire responsibility for all debts, accountability and duties.
What is the difference between unlimited liability and limited liability in business?
It depends on how a business is structured, but the owners may be responsible for whole debts or a certain percentage of debt.
‘Limited’ by definition means restriction, therefore owners are restricted with how much money they can lose. Companies such as a private limited company or a public limited company will have limited liability which means that owners can simply lose the money that they put into the business whilst their personal assets are protected.
Limited liability offers important protection for shareholders. This is because the company has a separate legal identity – the shareholders are not the same as the business.
However, limited liability does not protect against fraudulent trading.
‘Unlimited’ on the other hand, essentially means there are infinite ways in which a business owner might make a loss. Unlimited liability means that the business owners are personally liable for any loss the business makes. Sole traders and partnerships often have unlimited liability.
Why would you choose unlimited liability in business?
You would choose to set up an unlimited company if you do not want to publicly file financial reports and annual accounts.
It could also be useful to move capital more freely if needed – this is due to less restrictions on the return of capital to shareholders (the restrictions in the Companies Act 2006 only apply to limited companies).
Unlimited liability is suited to a business where the risk of insolvency is extremely low.
Unlimited liability is not as common as limited liability – but this may be because the advantages of unlimited liability are not fully understood.For expert business financial advice or to obtain a quote for business insurance, get in touch and we will be happy to assist you.