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In unlimited liability businesses, the owners and partners are wholly responsible for their company’s debts and all other financial commitments. An example of unlimited liability is where a sole owner is responsible for a business, making themselves and the business entity one and the same thing. If the company encounters cash flow problems and cannot pay its debts, creditors can use the owner’s personal assets to pay the company debts.
Unlimited liability isn’t capped, either by law or contract, and liabilities can include any damages assessed against a company, including lawsuits. Any legal obligations can be paid by seizing and selling an owner’s personal assets. This makes unlimited liability different from limited liability business structures. To avoid this element of risk, many companies tend to form a limited partnership rather than an unlimited liability partnership, where a partner’s liability can’t exceed that of their investment into the company.
In the UK, unlimited liability companies are created under the Companies Act 2006. Let’s find out a little more about unlimited liability, right here.
What is an unlimited liability partnership?
There are two types of unlimited liability models: sole proprietorship and general unlimited liability partnership. Here’s a little more information:
Sole proprietorships refer to organisations where an individual has complete control over the business. In this situation, only the owner’s assets can be used to pay the business’s financial obligations.
General partnerships consist of two or more people who have entered into business together. Unless the partnership agreement states otherwise, both partners share equal responsibility for profits and losses. Each partner can make decisions that create obligations for the other(s). If one partner signs a loan agreement on behalf of the partnership, for example, all the other partners will share liability for the debt. In an unlimited liability partnership, each partner is personally liable for all the debts in equal shares.
What is the difference between limited and unlimited liability?
The owners of a company have unlimited liability when there’s no legal separation between the owner and business entity.
Choosing a limited liability structure, on the other hand, means creating a separate entity for the business, thereby keeping an owner and partner’s personal accounts and assets and liabilities separate from the business itself. Limited liability means business owners are only responsible for business debts up to the value of their investment in the business, and a creditor can only seize assets or finances that belong to the company. Limited liability only applies to certain kinds of businesses, e.g., private limited companies.
The main difference between limited and unlimited liability businesses is the level of risk that business owners are willing to take. Having unlimited liability is a far greater risk for a business than having limited liability.
What are the implications of limited and unlimited liability?
Limited liability gives business owners a layer of protection. If a business goes into debt, limited liability means that owners will only lose their original investment into the company. Other personal finances and possessions are protected. A limited liability business has its own legal identity, so owners are not responsible for debts. Limited liability offers protection to shareholders too, because the company is a separate business entity, and the shareholders are not the same as the business.
Unlimited liability, on the other hand, can have significant repercussions for owners and partners. However, there’s one major reason some owners decide to proceed as an unlimited liability company – there’s no disclosure. This means that there are no public reports on money coming in or out of the business.
With unlimited liability, there is usually more freedom around compliance regulations, and there may be potential tax savings too. However, personal assets could be at risk, which is especially problematic if the business sees high levels of liability. Unlimited liability is best suited to companies which have a low risk of insolvency.
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