A1 Limited and Unlimited Liability
What is the impact on the owners of a business if they get into financial difficulty and cannot pay their suppliers or loans? It depends on whether their business is set up as limited or unlimited liability.
Sole traders and ordinary partnerships typically have unlimited liability. This means that if the business cannot pay their obligations, the owners are personally liable. This may mean they have to use their personal assets to pay debts. This may mean, using their personal savings, remortgaging their house, selling their car or asking relatives for a loan.
Limited companies have limited liability. This means that if the business cannot pay its debts, the owners’ personal assets are not affected. The owners and the business are seen as two separate entities in the eyes of the law. Therefore owners may lose the amount they invested in the business for example by buying shares, but they will not lose any more that that.
