Difference between Limited and Unlimited Liability

In business, terms like  limited or unlimited liability differentiate the personal liabilities of the owners and determine the extent to which an owner can be held liable or accountable for business related debts. If the company goes down the drain, the type of structure will be important for creditors, in terms of deducing the position of their investments.

If a company chooses to operate as an LLC, it offers owners personal protection, which implies that only business related assets and investments will come under scrutiny. A creditor cannot go after a company owner’s personal assets, which could include home, bank account, funds, etc. The creditors will only have to settle for payments generated from the company, rather than the owners.

However, in an unlimited liability scenario, the owners have an added obligation to pay their creditors with their personal assets, if the debt amount goes beyond the investment he or she made in the company.  This will make the owner liable to pay out the money by selling personal valuables and can end up losing his or her home, car, jewelry etc. Therefore unlimited liability is far more risky when compared to limited liability as the owner will need to pay up the amount until the debt gets satisfied.

On the flip side, opening an LLC requires additional documentation and fees, when compared to unlimited companies. Moreover, LLC will need to register itself in every state in which it chooses to operate or make a transaction. As an LLC is distinct from its owners, the rate of return for the investors may be low when compared to sole proprietorship and partnership, where only two or three participants are sharing the profits.

However, it makes it tough for an unlimited liability company to raise or generate money as there is greater exposure to debts. LLCs will generally have little problem attracting suitable investors due their distinct status.

Instructions

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    Limited Liability

    A concept where financial liability for a person is limited to the amount he or she has invested in a business. In case of bankruptcy or liquidation, a shareholder or owner is guaranteed protection from any unrelated business assets. The structure has existed since the first limited liability law, became effective in the state of New York in 1811.

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    Unlimited Liability

    This is a type of structure where business owners are jointly responsible for the whole debt owed by their company.   No cap exists when determining the amount payable to the creditors, where an owner must exhaust his or her personal resources to make up for unpaid business debts.

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