When starting a business, it is crucial to understand the concept of liability.
This refers to the degree to which a business owner is personally responsible for the debts and obligations of their business.
There are two primary types: unlimited liability and limited liability.
This article explains the difference between unlimited liability and limited liability.
Unlimited liability (Unincorporated)
Unlimited liability means that the owners of the business are responsible for all the debts of the company.
If the business goes bankrupt owing money the owner will have to pay all the debts of the company even if it means having to sell their personal possessions such as their house or car.
Common examples of unlimited liability structures include sole traders and partnerships. Sole traders and partnerships are unincorporated and have unlimited liability.
Limited liability (Incorporated)
Limited liability means that the owners (shareholders) of a company are only responsible for the debts of the company up to the amount of money they have invested in the company.
If the business goes bankrupt owing money, the shareholders will only lose the amount they have invested in the company. They will not have to sell their personal possessions to pay for the debts of the company.
Common examples of limited liability structures include private limited companies and public limited companies. Private limited companies (Ltd) and Public Limited Companies (PLC) are incorporated and have limited liability.
NOTE: Important People are more likely to invest in Private limited companies (Ltd) and Public Limited Companies (PLC) because they have limited liability and therefore their personal processions are protected. This makes it easier for companies to raise capital for expansions and therefore they are usually bigger companies.
The choice between unlimited and limited liability depends on various factors, including:
- Risk Tolerance: How comfortable are you with personal liability?
- Tax Implications: What are the TAX implications of each structure?
- Future Growth: How do you envision your business growing and evolving?
- Legal and Regulatory Requirements: What are the specific regulations in your jurisdiction?
It is essential to consult with a legal professional to determine the best structure for your business needs.
