Unlimited liability means that the owners of a business are liable for any and all debts incurred by the business. In addition to the assets of the business, the personal assets and wealth of the owners can be used to pay off the debts of the business.Proprietorships have unlimited liability because the person owning the business and the business itself are legally one and the same. The revenue of the business is the income of the owner. The debts of the business are the debts of the owner.
Partnerships, as a general rule, also have unlimited liability. Each partner is legally responsible for the debts of the business, and often the personal debts of the other partners. If one partner is unable to pay, then other partners are liable.
Phil Gardener
One illustration of unlimited liability can be had with a proprietorship such as that operated by Phil Gardener, the zucchini grower. Phil owns and controls all of the resources used to produce zucchinis--the property, the tools and equipment, and his labor. He devotes a section of his backyard, between the swing set and the koi pond, for zucchini production. He tills the land, plants the sends, plucks the weeds, and harvests the crop. He shares these duties with no one. He is THE guy in charge of growing zucchinis. Most important, he shares the profit (and loss) with no one. If a worldwide shortage of zucchinis drives the price higher, then Phil enjoys greater profit. Or if a zucchini blight wipes out his zucchini crop for the year, then Phil incurs the loss.
The complete control that Phil has over his business means unlimited liability for business debts. Suppose, for example, that Phil comes out on the losing end of a lawsuit filed by dozens of customers sickened by a deadly pesticide applied to his zucchinis. As a proprietor, Phil is personally liable for the damages. Any and ALL of Phil's assets can be used to pay the damages, including those totally unrelated to the zucchini business.
Phil might have to sell the speed boat and motor home that he won on the TV game show. He might have to cash in shares of OmniConglomerate, Inc. corporate stock that he received as a birthday present from Winston Smythe Kennsington, III.
Schrumpmeyer and Schrumpmeyer
Another illustration of unlimited liability is found with the legal partnership of Schrumpmeyer and Schrumpmeyer, Attorneys at Law, owned and operated by Sean Schrumpmeyer and Sally Schrumpmeyer. Sean and Sally share ownership of this business, including the building, equipment, and other resources. They both devote their own labor resources to the business. AND they share any profit or loss.Should Sean, as he is prone to do, incur several sizeable debts (for luxurious office furniture, business trips, and legal malpractice suits), then Sally can be held responsible for payment. In particular, both Sean AND Sally can be forced to use personal property and assets unrelated to the operation of the business to pay these debts. Should Sean incur a big debt, then Sally might be forced to sell her house, car, and valuable stamp collection to pay it off.
Unlimited liability means that the ownership of the Schrumpmeyer and Schrumpmeyer law firm is unlikely to expand beyond a few trusted people. Sean and Sally might think twice about bringing their siblings Tod and Traci into the partnership because both are even more irresponsible than Sean when it comes to incurring big debts.
A Limited Alternative
A comparison between partnerships and corporations illustrates the difference between unlimited liability and limited liability. Both types of business organizations can be owned by several individuals. The prime difference is that partnership owners have unlimited liability while corporation owners have limited liability.Unlimited liability for a partnership means that EVERY partner can be held liable and responsible for any and ALL debts of the other partners. For this reason, each partner MUST place a great deal of trust in every other partner. The more partners involved in a partnership, the more difficult it is for each to trust the others. One mistake by one partner can destroy the lives of every partner. As such, unlimited liability tends to keep partnerships relatively small.
In contrast, corporation owners have limited liability. Each owner, each person who owns shares of the company's stock, stands to lose no more than the value of the stock. The worst that can happen to the stockholders is that the company goes out of business and the stock becomes worthless. One does not need to place a lot of trust in the others. In fact, one owner need not, and probably does not, know who else owns shares in the company.
If the Schrumpmeyer and Schrumpmeyer business was organized as a corporation with limited liability, then Sally's personal property is not at risk from Sean's debts. Should Sean force the corporation to incur a big debt, then Sally's corporate stock might become worthless, but the rest of her personal wealth remains intact.
UNLIMITED LIABILITY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: April 28, 2024].
