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Unlimited liability means that the owners of a business are liable for the entire amount of debt and obligations of that business.  Unlimited liability is most common in general partnerships and sole proprietorships.  It can cause personal hardship for business owners if their company is not able to pay its debt, because creditors can turn to the owners’ personal assets to pay outstanding debts.

Because of this, many people who start a business use a structure that has limited liability for the owners.  This means they are liable only up to the amount they have invested in the business. 

Unlimited liability is especially risky in a general partnership situation where the liability is also joint and severable.  For instance, Nadia and Mary form a partnership as a nail salon that Nadia will operate. Mary provides all the funding for the business by investing $20,000 to start the salon.  Mary and Nadia will share the profits.  If Nadia incurs $100,000 in debts to vendors, and the business is unable to pay, then those vendors can look solely to Mary for repayment.

Even when a small business operates as a corporation or LLC, creditors and suppliers often require the business owners to personally guarantee debts before they will extend credit.  However, personal guarantees often negate the limited liability protection of such business structures, and turn the debt into a form of unlimited liability. 

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