Unlimited LiabilityDefined with Examples & Concepts
What is an Unlimited Liability?
Unlimited liability means that the owners of a business are responsible for the business’s debts.
In other words, should the business fail, the owners could have their personal assets confiscated to pay the business’s debts.
Understanding Unlimited Liability
This means that any debt that the business takes on and cannot pay, the business owner will be responsible for.
When the business has more than one owner, the owners are equally responsible for these debts.
If the business owners cannot pay the debt, their assets can be appropriated to pay the debt.
With a limited liability company or limited partnership, the business owners only lose what they invested in the company.
They do not have to worry about their personal assets being seized to pay the business’s debts.
An example of this would be five people who decide to form a partnership in which each partner invests $100,000 in the business.
After two years in business, the business is $300,000 in debt.
Should the business be unable to pay its debt or default on the debt, the five partners would be equally liable for paying the debt.
Therefore, if the business fails, the partners will not only lose their initial investment of $100,000 each, they would each have to pay an equal portion of the $300,000 the business owes.
This means each partner would have to pay $60,000 to cover the business’s liabilities.
Unlimited liability companies are more likely to be found in areas in which company law is based on English law.
In Great Britain, businesses can register to form or incorporate their unlimited liability company through the Companies Act of 2006.
There are other countries where businesses form their unlimited liability companies under English law, such as India, Ireland, Pakistan, and New Zealand.
Unlimited liability companies are common in France, the Czech Republic, and Germany as well as two jurisdictions in Canada.
But in Canada, these companies are typically called unlimited liability corporations.
Even though unlimited companies can be found in many countries, they are not a very common wait for a business to incorporate because of the fact that they leave owners liable for the business’s debt should the business fail or simply be unable to pay the debt.
However, there is one benefit that causes some people to want to have an unlimited liability company, and that is non-disclosure.
Unlimited liability companies do not have to publicly file financial reports, and some companies prefer the privacy this gives them.
Joint Stock Companies and Unlimited Liability
These companies are similar to unlimited liability companies in that the investors have unlimited liability for the business’s debts unless the joint-stock company is incorporated.
A joint-stock company is basically the same as a corporation except that the joint-stock company has unlimited liability since it has not been incorporated.
Joint-stock companies are formed through a private contract, and just like a corporation, and they are their own entity.
These companies are generally formed to finance a business that would be too expensive for one individual to finance.
Unlimited Liability Example
Suppose three friends decide to form a partnership and open a restaurant.
They each invest $50,000.
They also obtain a loan of $200,000, which they will have to repay.
Should the business not make enough money to repay the loan, the partners will be held liable for the loan.
If necessary, the assets of the partners can be appropriated to satisfy the loan.
If one or more of the partners has no assets, the remaining partner’s assets will be used to satisfy the $200,000 debt, even though the three partners are equally liable.
If the partners had decided to form their business as a limited partnership or a limited liability corporation, they would not have had to worry about losing their personal assets due to business debts.
Instead, they would only lose their initial investment of $50,000 should the business fail.
Limited liability corporations are a good way for people to form a business without having to worry about losing their personal assets other than their unusual investment.
- Businesses typically prefer to form limited partnerships or limited liability companies so that they are only liable for their initial investment in the business.
- One of the most important benefits of having an unlimited liability company is that you do not have to publicly file financial reports.
- Unlimited liability companies are generally sole proprietorships or general partnerships in which the owners are equally liable for any business debts.
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University of Chicago "Unlimited Liability in Early American Corporations" Page 1 . January 11, 2022
Cornell Law School " 12 CFR § 239.26 - Shareholders" Page 1 . January 11, 2022