Unlimited liability refers to the legal obligations general partners and sole proprietors because they are liable for all business debts if the business can’t pay its liabilities. In other words, general partners and sole proprietors are responsible for paying off all of the company debts personally if the company can’t make its payments.
In this sense, the business owners are unlimitedly liable for all the business actions. Lawsuits create a big problem for partners with unlimited liability. For instance, if a customer slips and falls injuring himself in your store, the customer could sue the business. If the business does not have enough money to pay the judgment, the customer can then sue the general partners. If the general partners don’t have enough money to pay the suit, the court can order the general partners to sell personal assets like houses and cars to settle the suit.
As you can see, unlimited liability is not favorable. That is why many partnerships are organized as limited liability companies and limited liability partnerships. Both of these business forms offer some type of liability protection similar to corporations.
Corporations offer shareholders limited liability. This means that the owners do not guarantee the corporate debt and can’t be force to pay off corporate obligations. Corporate shareholders can only lose their investment in the stock itself. This is why they are considered to have limited liability. No investment will eliminate liability altogether, but corporate and LLC structures help maximize liability protection.
