Loading the player...

What is an 'Unlimited Liability'

An unlimited liability business involves joint owners that are equally responsible for debt and liabilities accrued by the business; this liability is not capped and can be paid off through the seizure of owners’ personal assets, making it different from limited liability ventures.

BREAKING DOWN 'Unlimited Liability'

Unlimited liability, which typically exists in general partnerships and sole proprietorships, indicates that whatever debt accrues within a business – whether the company is unable to repay or defaults on its debt – each of the business’ owners is equally responsible and personal wealth could reasonably be seized to cover the balance owed. For this reason, most companies opt to form as limited partnerships instead of risking personal assets through unlimited liability businesses.

Consider, for example, four individuals, working as partners, each invest $35,000 into the new business they own jointly. Over a one-year period, the company accrues $225,000 in liabilities. If the company cannot repay these debts, or if the company defaults on the debts, all four partners are equally liable for repayment. This means that in addition to the initial investment of $35,000 that each partner made, all four owners would also be required to come up with $56,250 to alleviate $225,000 in debt.

The Foundation of Unlimited Liability

Unlimited liability companies are most typical in jurisdictions where company law is derived from English law. In the United Kingdom specifically, unlimited liability companies are incorporated or formed through registration under the Companies Act of 2006. Other areas where these companies are formed under English law include Australia, New Zealand, Ireland, India and Pakistan.

Germany, France, the Czech Republic and two jurisdictions in Canada are also areas where unlimited liability companies are commonly formed, however, they are referred to as unlimited liability corporations in Canada.

Despite the number of companies and countries/areas in which unlimited companies exist, they are a fairly uncommon form of company incorporation due to the sometimes severe burden placed upon owners to cover a company’s debt, specifically when the company faces liquidation.

One of the benefits of unlimited liability is nondisclosure. Etsy, an online crafts marketplace, created an Irish subsidiary in 2015 that is classified as an unlimited liability company, meaning that public reports on money the company moves through Ireland - or tax payment amounts - are no longer required.

Unlimited Liability in the United States

A type of company similar to an unlimited liability operates in the U.S. in the form of a joint-stock company (JSC). Among other states, JSCs operate under associations in New York and in Texas, under the Texas Joint-Stock Company/Revocable Living Trust model. This model has basic differences from a general partnership, including a lack of limited liability for shareholders, formation through a private contract that creates a separate entity and the fact that one shareholder cannot bind another shareholder in regard to liability – each is equally responsible.

RELATED TERMS
  1. Limited Liability

    Limited liability is a type of liability that does not exceed ...
  2. Other Long-Term Liabilities

    Other long-term liabilities are a balance sheet item that lumps ...
  3. Current Liabilities

    Current liabilities are a company's debts or obligations that ...
  4. Adjusted Liabilities

    Adjusted liabilities are used in the insurance industry to show ...
  5. Mismatch

    Mismatch generally refers to incorrectly or unsuitably matching ...
  6. Tax Liability

    A tax liability is the amount an individual, corporation or other ...
Related Articles
  1. Investing

    Examples Of Asset/Liability Management

    In its simplest form, asset/liability management entails managing assets and cash inflows to satisfy various obligations; however, it's rarely that simple.
  2. Investing

    How to Analyze a Company's Financial Position

    Find out how to calculate important ratios and compare them to market value.
  3. Personal Finance

    Common Liabilities That Hurt Your Net Worth

    Every penny that you keep out of the liability side of the net worth equation essentially ends up on the asset side.
  4. Investing

    AT&T Joins Unltd. Data War; Sprint Ups Offerings

    AT&T takes a page from Verizon, announcing it too will offer an unlimited data plans.
  5. Insights

    Limited Liability Partnership (LLP): The Basics

    Limited liability partnerships (LLPs) are a flexible, legal and tax entity that allows partners to benefit from economies of scale while also reducing their liability.
  6. Insurance

    An Advisor's Guide to Prof. Liability Insurance

    A guide to what financial advisors need to know about professional liability insurance.
  7. Taxes

    Deferred Tax Liability

    Deferred tax liability is a tax that has been assessed or is due for the current period, but has not yet been paid. The deferral arises because of timing differences between the accrual of the ...
RELATED FAQS
  1. What are the official FASB guidelines regarding contingent liabilities

    Learn how the Financial Accounting Standards Board, or FASB, treats the recognition, estimation and disclosure of contingent ... Read Answer >>
  2. How do you calculate company equity?

    Find out more about company equity, or shareholders' equity, what company equity measures and how to calculate a company's ... Read Answer >>
  3. What are the major types of business in the private-sector and how do they differ ...

    Learn more about how private companies are organized and how large and small companies differ from one another in organization ... Read Answer >>
Hot Definitions
  1. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  2. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  5. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained in a company’s financial statements.
Trading Center