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.