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What Is Unlimited Liability?

While the risks associated with an unlimited liability company are higher, there is greater potential for financial rewards.
The potential for financial rewards is often higher with unlimited liability agreements.
Choosing to enter into a partnership with unlimited liability is a decision that should not be made lightly.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 22 November 2014
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Unlimited liability is a reference to the level of responsibility held by the owner or an investor in relation to the function of a business operation. When the liability is unlimited, there is a chance that the personal assets of the principal parties can be drawn upon to settle debts or claims against the business. This means that owners and investors can easily stand to lose everything in the event of a corporate failure.

There is some distinction in the amount of liability held by the owner and the investors in this type of business structure. With the owner, the liability is complete — that is, all the assets of the owner can be drawn upon to settle legal disputes or outstanding debts of the company while it is in operation. By contrast, most countries have laws that protect investors from these claims, unless the company goes bankrupt and is forced into liquidation. At that point, the current investors and any investors who sold their shares during the preceding 12 months are also considered liable for the debts of the corporation.

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An unlimited liability corporation, or ULC, is very different from the more commonly known limited liability company (LLC). With a limited liability corporation there are legal limits on the obligations of both the owner and the shareholders in terms of accessing private resources to cover company debts. This means that the degree of risk associated with operating or investing in an LLC is somewhat less. Still, the potential for financial rewards with the ULC is often higher and can lead to significant profits for all concerned.

Choosing to enter into a partnership with unlimited liability is a decision that should not be made lightly. Potential investors should evaluate the current status of the company closely and attempt to develop an accurate projection of the long-term viability of the business operation. At the same time, the investor should determine how well he or she could weather the failure of the company, if personal assets were seized in order to settle company debts. If there are any factors that indicate the business has a high probability of failure, and the investor has limited assets, it may be a good idea to look for other investments that carry less of a risk.

In like manner, anyone who wishes to start a business would do well to understand all current laws that apply to its creation and operation. Doing so will make it easier to determine if the dream of the new business is worth the possibility of losing everything, should the business fail to achieve profitability within a reasonable period of time. Business counselors can help potential business owners understand the legal ramifications of an unlimited vs. limited liability model, and help the client determine which approach is in his or her best interests.

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Comparables
Post 3

@ Fiorite- The biggest benefits of the partnership and sole proprietorship have to do with taxation, cost, and control.

Forming an LLC can be costly for an individual or a few partners looking to start a small business. A sole proprietor or a group of partners also avoids the dual taxation that an LLC or corporation is subject to. Corporations have to pay taxes as its own entity, then every investor pays taxes on his or her share of the dividends. Finally, those in sole proprietorships and small partnerships often have more control over the day-to-day operations of their business than a corporation or a group of limited liability investors.

Fiorite
Post 2

@ GenevaMech- What are some of the benefits of the a sole proprietorship or partnership versus those of an LLC or an S corp?

GenevaMech
Post 1

Those who are in an unlimited liability company will actually only lose investments related to the company. Investors in an LLC are not held personally liable for any of the businesses debts, claims, etc. The disadvantage of this is there are tax benefits that someone invested in a limited liability company cannot access.

Examples of an unlimited liability business organization would be a sole-proprietorship or a partnership. In these situations, the owners of the company receive all of the profits from the business, but assume all liability for any lawsuits, debts, etc. If the business were to fail, the owner’s personal assets could be liquidated to pay for the business liabilities.

Limited and unlimited liability companies have their benefits and disadvantages. When choosing a business organization it is best to study all options and weigh the risks and benefits of the type of organization.

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