What is unlimited liability?
The definition of ‘unlimited liability’ is “the full legal responsibility that business owners and partners assume for all business debts”.
This responsibility is not limited and, unlike the well-known limited liability corporate structure, liabilities may be satisfied by the seizure and sale of the owners’ personal assets.
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.
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.
In the UK, unlimited liability companies are created under the Companies Act of 2006.
WHAT ARE THE ADVANTAGES & DISADVANTAGES OF UNLIMITED LIABILITY IN BUSINESS?
Unlimited liability, like all business structures, comes with its advantages and disadvantages. If you are considering using the unlimited liability structure, work through the advantages and disadvantages below before making your final decision.
Advantages of Unlimited Liability
- More freedom – there are usually less compliance regulations to adhere to with unlimited liability
- Confidentiality – a UK unlimited company generally doesn’t need to file annual accounts to Companies House, meaning the affairs of the business are largely kept hidden from competitors
- Potential tax savings – depending on the level of profit, there could be some tax advantages to having unlimited liability using non-disclosure
- Management Quality – as the owners of an unlimited liability business have a lot to lose if things go wrong, the management team may encourage careful risk management
Disadvantages of Unlimited Liability
- 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
- Due to careful risk management by the owners, potential opportunities to grow the business can be missed
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.