What is unlimited liability in business?

When starting a business, either alone or with partners, there are a few different legal structures you can choose from. The different structures have huge implications on how you deal with financial information, company information, taxes, and debt. 

This article will discuss unlimited liability, what it means, and how it’s different from limited liability. Specifically, we’ll cover the following topics:

• Limited liability vs unlimited liability: What’s the difference?
• How does unlimited liability work?
• What are the advantages of unlimited liability?
• What are the disadvantages of unlimited liability?

For more information about different legal structures, try our other article, “How to set up your business: Sole trader or limited company”.

To explain unlimited liability, it’s probably easier to explain limited liability first. 

When setting up a business, you can choose to register that business as a limited company. If you do, then your company will have limited liability. This means that the company is a legally separate entity from its owners, partners, and shareholders.

The legal separation adds a level of protection against any company debts. If the company has debts (liabilities), the owners, partners, and shareholders are not personally responsible for them, so their private assets are protected. In other words, they’re only liable for their initial investment (they have limited liability). 

On the other hand, unlimited liability offers no protection to business owners and partners. If your business has debts, then you’re responsible for them. You’re legally required to pay them back, even if it means using your own money. 

For example, if you and a partner each invest £50,000 into a limited liability company. Then the financial risk is capped at £50,000 for both of you. Your liability is limited to £50,000. 

So even if the business takes on another £200,000 in liabilities, and the company goes bust, the most you can both lose is £50,000. 

If, on the other hand, you’ve set up an unlimited liability company, then both you and your partner will be equally responsible for the debt, meaning you’ll need to pay back an additional £100,000 each, on top of the initial £50,000 investments. 

By default, any business that isn’t a limited liability company (LLC) has unlimited liability. For example, if you’re a sole trader, then you have unlimited liability and you’re responsible for all of your debts. 

That said, it’s possible to become a company with unlimited liability. Although it’s not a common choice because of the lack of protection, there are a few instances where business owners might choose unlimited liability. 

When you set up an LLC, you need to register your company with HMRC and Companies house. On top of that, you need to record and publish your trading information so that it’s publicly visible. 

An unlimited company doesn’t have to disclose its dealings, meaning it has more privacy than companies with limited liability. This seems to be the most common reason that a business would choose to become an unlimited liability company. 

For example, in 2015, Etsy (an online crafts business) created an unlimited liability company in Dublin. As such, they can now move any amount of income through their Dublin-based company without having to report any earnings or taxes. It’s just one of a number of international companies that have chosen to set up unlimited liability companies in Dublin.

For businesses with unlimited liability by default, like sole traders, you have complete control over financial decisions because you don’t have to worry about shareholders. 

On top of this, the amount of tax you pay could be lower depending on how much profit you’re receiving. Normal income tax for unincorporated businesses gets higher the more you earn, while corporation tax is a flat rate of 19% of your profits. 

The biggest disadvantage of unlimited liability, as we’ve already mentioned, is the risk involved. With unlimited liability, you’ll be personally responsible for all of your business’ liabilities because you and your business are not legally separate entities. 

This means you’ll have to pay off any business debts using your own money. Your personal finances can even be seized and sold off to pay for business debts. 

On top of the financial risk, there are some other disadvantages to consider with unlimited liability.

The level of personal risk can be incredibly stressful on a business owner, particularly if you have dependents you need to support. This is one of the major advantages of limited liability in the first place. 

It’s not just your finances at risk. Unlimited liability means that your partners and shareholders are also liable if the company goes bankrupt. That level of risk is enough to put off a lot of investors, so it could prove much harder to secure funding from private investors. This will generally make growth a lot more difficult. 

Financial management can be stressful and time-consuming when you’re self-employed. That’s why thousands of business owners use the Countingup app to make their financial admin easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here.