What is Unlimited liability? How is different from limited liability?

What is Unlimited Liability?

Unlimited Liability is the legal obligation of company founders and business owners to repay, in full, the debt and other financial obligations of their companies. This legal obligation generally exists in businesses that are proprietorships or general partnerships. Each company owner is equally responsible for repaying the business’ financial obligations. These obligations can be paid through the sale of owners’ personal assets. Most companies opt to form a limited partnership, where a partner’s liability cannot exceed their investment. For many companies, nondisclosure is a benefit of forming a foreign unlimited liability subsidiary. 

Unlimited Liability Vs. Limited Liability

The key differences between Unlimited Liability and Limited Liability can be seen as below:

Unlimited LiabilityLimited Liability
Business owners are legally obligated to repay the debt obligations of their companiesBusiness owners are not legally obligated to repay the debt obligations of their companies
The financial assets of the owners can be seized to repay the obligationsThe financial assets of the owners cannot be seized to repay the obligations
Unlimited Liability exists in sole proprietorship and general partnershipsLimited Liability exists in limited liability companies and partnerships. 

Example of Unlimited Liability

Let us assume two partners manage a business in which they invested $20,000 each. The business also took out a loan of $100,000 that needs to be repaid. If the business is unable to pay back the loan, the two partners will be equally liable to settle the obligation.

In such an event, the personal assets of the partners can be seized against the claims. If one partner does not own any assets, the second partner’s assets will be seized to recover the full $100,000. If the business were structured as a limited liability corporation or limited partnership, the two partners would only lose their initial investment of $20,000 each. This example illustrates the benefit of adopting limited liability structures. With limited liability, the personal wealth of the business owners are not at risk. Only their initial capital is lost.