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.
