Business ownership - EduqasLimited and unlimited liability for businesses
There are a number of different options when setting up a new or small business. These may depend on the size of the business, the number of owners and the level of risk owners are willing to take.
Effects of limited and unlimited liability for business owners
Limited liability
Limited liability When the business owner or owners are only responsible for business debts up to the value of their financial investment in the business. provides a layer of protection for business owners. For example, Karim invested £15,000 when setting up a plumbing business and he owns 100% of the shares. If the business went £50,000 into debt, limited liability would mean that Karim would only lose his original £15,000 investment. His other personal finances and possessions would be protected.
A limited liability business has its own legal identity, meaning that its owner(s) are not personally responsible for its debt A sum of money owed by an individual or business to another person or business. .
Unlimited liability
Unlimited liability When the business owner or owners are personally responsible for all the debt of the business, no matter what the value. can have big implications for business owners. Having unlimited liability gives business owners a greater amount of risk. For example, Sarah set up a corner shop as a sole traderA business owned and controlled by one person. and initially invested £10,000. If the business went into £60,000 of debt, Sarah would be personally responsible for the whole of this debt. This would mean that she would have to use her personal savings and possessions to pay off all of the £60,000.
An unlimited liability business does not have its own legal identity and the owner(s) are personally responsible for all debts of the business.
