Define unlimited liability
Unlimited liability is the legal duty for sole traders and general partners as they are liable for all debts of the business if the business could not pay the debts by its wealth. Hence the personal assets of the sole proprietor or general partners can also be sold to pay the debts of the business. However, in limited liability, partner’s liability will be limited to the extent of their shares.
Sole proprietorships are common as one man business are subject to unlimited liability and they limit their business debts in accordance to their investment. However, due to the nature of the concept, unlimited liability companies are very uncommon. In United Kingdom, unlimited liability companies are formed under the Companies Act 2006. Moreover, Australia, New Zealand, Ireland, India, Pakistan, Germany, France, Czech Republic and some parts of Canada forms unlimited liability companies according to the English Law. Still, unlimited liability companies can be formed in many countries.
There are both advantages and disadvantages of unlimited liability companies. The advantages includes nondisclosure as they are excused from registering their annual accounts in registrar’s office, and creditors confidence as they take such risks, and have the guarantee that they will be paid either way.
The disadvantages are more and risky in the concept of unlimited liability. First of all, the liability concern is the main disadvantage as owners personal assets can be sold to pay the business debts if the company fails to pay the debts. Another disadvantage of an unlimited liability company is that they miss a lot of opportunities as they could not take high risk opportunities. Hence their growth is slow compared to limited liability companies. Difficulty in borrowing capital is also a disadvantage to unlimited liability companies. As their financial reports and management are hidden to the public, they faces several difficulties when it comes to borrowing capital.