Limited liability is where the liability of a company’s shareholders is detached from the company. What this means is that shareholders can only lose (are therefore liable for) the value of their investment in the share capital of the company. The concept of limited liability is an important protection for shareholders in a company. The reason why limited liability arises for shareholders is because the company has a separate legal identity. The shareholders are not the same as the business.

Implications of unlimited liability

The most important drawback of operating as an unincorporated business (e.g. sole trader or partnership) is that the owner is liable for the debts of the business. If they are unable to pay business debts to banks and suppliers they could lose personal assets.

Implications of limited liability.

A business with limited liability are owned by shareholders. A shareholder is an individual institution that owns a percentage of a company. As a limited liability is a separate legal entity, the personal assets of the shareholder is protected. Limited liability companies may also find it easier to raise large amounts of capital through the sources available to them

Shareholders gain from shares in two ways: through profits returned in the form of dividends and in the rise of the price of the shares held when they come to sell them.

Finance appropriate for limited and unlimited liability businesses.

Limited: share capital, retained profit, venture capital, business angels, bank loans.

Unlimited liability business: personal savings, retained profit, mortgages, unsecured bank loans, peer- to peer lending, crowdfunding, grants, bank overdrafts.