Limited and Unlimted Liability

Different forms of business in the private sector:

Unincorporated:

• The owner is the business- No legal difference

• Owner has unlimited liability for business actions (including debts)

• Most unincorporated businesses operate as sole traders

• Unlimited liability

• A company is a separate legal entity

• The owners of a company are shareholders

Examples:

• Sole trader

• Partnership

Incorporated:

• The legal difference between the business and the owners

• Owners (shareholders) have limited liability

• Most incorporated businesses operate as private limited companies

• Limited liability

Examples:

• Private limited company

• Public limited company

What is Unlimited liability?

• A characteristic of incorporated businesses

• Business owner/s are personally responsible for the debts and liabilities of the business

• If the incorporated business fails, the owners are liable for the amounts owed

• Unlimited liability adds to the risk of operating as a sole trader or partnership

Importance of limited liability:

• An important protection for shareholders in a company

• Shareholders can only lose the value of their investment

• They are not liable for the debts of the company