Business ownership - OCRLimited and unlimited liability

Limited liability

Limited liability means that the business owner or owners are only responsible for business debts up to the value of their financial investment in the business. This means that a creditor can only take assets or finances belonging to the company. Limited liability only applies to certain types of business, such as private limited companies.

The implications of limited liability

Limited liability 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 debts.

Unlimited liability

Unlimited liability means that the business owner or owners are personally responsible for all of the debts of the business, no matter what the value.

The main difference between unlimited and limited liability is the level of risk that a business is willing to take. Having unlimited liability is a bigger risk for any business than having limited liability.

The implications of unlimited liability

Unlimited liability 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 trader 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.