Unlimited Liability

Unlimited liability means that the owner(s) of a business is personally responsible for any debts the business racks up. This means that if a business can’t pay its debts, the owners could be held liable and lose their personal assets, such as their home or savings.

For example, if your business is in £20,000 worth of debt, and you’ve splashed out on a gorgeous £20,000 Tesla, this could be taken to settle the debt from your business, even though the car has nothing to do with the business (other than being owned by the same person).

It is common for sole traders such as freelancers, self-employed hairdressers, electricians, etc. to have unlimited liability for their businesses.

What’s the difference between unlimited liability and limited liability?

Limited liability means that the owners of a business won’t personally be held responsible if a business fails to pay its debts.

Unlike unlimited liability businesses, creditors can’t seize your personal valuable goods to settle debts that your business has racked up. They can only take money or assets that belong to the business. So even if your business finances are up in the air, you won’t be at risk of losing your car or belongings.

Here are some types of businesses that favour limited liability over unlimited liability:

  • Cafes, restaurants, and bars
  • Professional services like accountants or solicitors
  • Contractors, builders, and handymen

So, if a cafe fails to sell enough to keep itself afloat, the owners won’t have to settle any debts using their personal savings or belongings. Instead, they may have to sacrifice their business assets, such as machinery.

Are there any benefits to unlimited liability?

Not being personally liable for any business-related debts sounds like the obvious solution to cover your back in case your business isn’t an immediate success. Actually, there are a few reasons why a business owner may opt for unlimited liability over limited liability:

  • Unlimited liability companies don’t have to file annual accounts to Companies House – this means they don’t have to make their profits or losses public. This also means less paperwork.
  • Limited liability businesses are subject to more rules and regulations than unlimited liability companies – this is because they’re considered ‘legal entities’.
  • The owner of an unlimited liability company has full control over the business and is entitled to the company’s profits after taxes.

Frequently Asked Questions

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