Limited and Unlimited Liability

the person who assumes full co-ownership of a partnership, including unlimited liability, is a
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hi there lets take a look at one of the most important concepts in business its a distinction between limited and unlimited liability this all boils down to the question of who pays the debts who is liable for the debts of a business if it fails when a business goes out of business owing money who is reliable for those debts this is at the heart of this concept of liability and it links in very closely with the different forms of business his to explain why unincorporated businesses I business forms that are not companies and there are two main ones sole traders and partnerships only cooperative businesses the owners have unlimited liability for the businesss actions including the debts and of course most unincorporated businesses are sole traders welcome back to this unincorporated businesses the owners have unlimited liability whereas incorporated businesses ie companies the owners of the business have limited liability the shareholders of the business have limited liability and there is a reason for this because and the reason is there is a legal difference between the business and its owners lets

explore this for another minute or so to summarize unincorporated businesses sole traders and partners partnerships have unlimited liability in cooperative businesses I companies have limited liability so what is meant by unlimited liability well its basically whos paying the debt and in the case of an unincorporated business like a sole trader or partnership the business owner and the business are one and the same thing if you run a business as a sole trader and you end up going out of business and owing money to people its you who owes the money not the business you are required to settle it the business fails you are liable and therefore only unlimited liability is a significant down side and a risk if you choose to operate as an unincorporated business or sole trader or a partnership since bad news you run your sole trading business it goes under if it fails you are personally responsible that you have unlimited liability whereas if you set up the business as a company this gives you an advantage because so far as the law is concerned the company

private limited company normally is a separate legal entity there is a difference between the company and its shareholders so you saw the owners but you are not the company you own shares in a separate limited company so if that company fails the shareholders are not liable for the debts of the business and this is one of the most important protections to shareholders that they can only lose the value of their investments theyre not liable for the debts of the company so there we go thats the key point and it all links with the form of business you choose to use to trade owning cooperating businesses dont forget AQA students you dont need to know about partnerships as Excel students you do sell traders and partnerships you have unlimited liability but if you form as a company then you get the protection of limited liability where the shareholders are not responsible if the business goes under there we go hopefully thats useful a really important concept make sure you go through this again if youre not sure this distinction between limited and unlimited liability

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