What is Unlimited Liability in Business?

Concept of Unlimited Liability

Unlimited liability refers to the liability of the partners where they are responsible for the debts of the company; there is no maximum value of the debt. Every legal partner of the company accounts for the full amount of the debt. The partners are mutually responsible for the repayment of the full amount of the debt.

In unlimited liability, the personal assets of the partners are not protected. It means that the partners will have to repay the debt from their assets also if the company does not have a sufficient amount left to repay.

So, various companies in the UK prefer to take the limited liability company as their assets will be protected. Risk factor increases in unlimited liability companies. Companies Act 2006 is the act that governs unlimited liability companies in the UK.

In the UK, businessmen who want to have unlimited liability can start their private unlimited company as sole traders businessmen who want to have unlimited liability can start their private unlimited company as sole traders have unlimited liability and they manage the operations, finance, and debts of their business on their own. Other incorporated businesses also have unlimited liability.

Advantages of Unlimited Liability

Advantages of Unlimited Liability

The businessmen having unlimited liability companies get more tax benefits than the businessmen who have limited liability companies. These tax benefits result in potential tax savings for them.

Also, in unlimited liability business owners have to follow fewer regulations so they have more freedom to make the decisions. These businesses need not disclose any public reports about their inflows and outflows in the business.

Disadvantages of Unlimited Liability

Businessmen having unlimited liability sometimes need to put their assets at stake, this causes problems for them and their families in the long run. Also, banks often do not grant loan to businessmen having unlimited liability which become a big problem for them.

Difference between an Unlimited and Limited Liability

In a limited liability, there are restrictions on the amount to which partners are liable to repay the debt but in unlimited liability, there is no restriction on the amount partners are liable to repay the debt.

In limited liability, a separate identity is created for the business in the eyes of the law and the business has its accounts and assets but it is not the same in case of unlimited liability as the law can seize their assets also in case the debts are not covered.

Unlimited Liability Company

An unlimited company is a company where the partners have unlimited liability. It is also known as a private unlimited company. In the UK, there are less than 5000 unlimited companies because of its serious disadvantages. It has several benefits also but there are major loopholes also.

The unlimited liability company is registered under the Companies House, but it has features similar to sole traders.

Advantages of an Unlimited Liability Company

Risk Management

Risk Management

As there is more risk in an unlimited company, the owner focuses to manage the risks properly and effectively so that he does not suffer any losses. The extra risk results in careful risk management by the owners.

The shareholders of an unlimited liability company also have an interest in the decisions of the business. Proper risk management will help the owners to reduce the risks in the long run leading to increases profits.

Confidence of parties

Various outside parties especially the creditors have more confidence in an unlimited liability company because of its features such as efficient risk management. As the shareholders bear the liability of repayment of debt and there is efficient risk management also, the creditors prefer to lend money to the unlimited liability company than the limited liability company.

Confidentiality of information

An unlimited liability company does not need to disclose its reports in public and they also do not require announcing their accounts in the Companies House. Although the owners prepare the financial accounts, the information is not present in the public records.

It also becomes a big advantage for the unlimited companies as they can view their competitors account and need not disclose information about themselves.

The shareholders of the company also do not have any problem with not sharing the financial statements with the public because the dividends paid to them are also not shared which is more beneficial and attractive for them.

More options for share capital

It is more flexible and easy to return capital in an unlimited liability company than the limited liability company because limited liability has its regulations and restrictions.

The characteristics of unlimited liability company make it easier for the owners to move capital between entities.

Disadvantages of an Unlimited Liability Company

Loss of Opportunities

Over risk management can lead low-risk approach; this approach leads to steady growth in the business as owners can ignore many opportunities to avoid risks.

Ignoring opportunities can hamper the growth of the business in the long run; the shareholders can be dissatisfied with such results as according to them if they are investing their full capital then they should their desired dividends and profits.

Requires proper understanding

Requires Proper Understanding

As the rules and regulations are different from limited liability, the shareholders and several other parties need to understand unlimited liability properly to understand the working of an unlimited liability company.

Sometimes due to lack of information, there are no proper advisors for an unlimited liability company, and if even there are advisors, then their advice sometimes leads to losses on the part of the owner.

Unlimited Liability

The major drawback of an unlimited liability company is the unlimited liability of the partners and it is one of the major reasons why people of the UK do not start an unlimited liability company as they can lose their assets if they suffer loss in their business leading to problems in the long run.

So, an unlimited liability can make the owner lose their assets. But there are several benefits also. People need to have in-depth knowledge about unlimited liability to earn higher profits.

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