The Difference Between Limited & Unlimited Liability

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The difference between limited and unlimited liability is significant for business owners. Limited liability means you don't face much personal financial risk for debts of your business. Unlimited liability means you are exposed to potential losses based on company obligations.

Limited Liability Partnerships

A limited liability company is a primary business structure used by multiple owners who are looking for personal protection. It gives you the best of both worlds, according to the U.S. Small Business Administration, with the same limited liability enjoyed by corporate shareholders but without the double taxation faced by corporations. To form an LLC, you file registration paperwork in your state of operation. All member owners of the company are financially insulated from business debts. You only risk losing your investment if the business sours. All partners remain responsible for their own negligent or illegal behavior that causes harm to others.

Unlimited Liability Structures

Partners in a traditional general partnership structure aren't so lucky. The business isn't legally treated as a separate entity from the partners, so you do face unlimited liability risks in this structure, according to AccountingTools. If the company loses a lawsuit and is assessed damages well in excess of its finances, the partners would typically be ordered to cover the additional obligation.

Individuals who operate as sole proprietors and general partners in a limited partnership structure all face unlimited liability. Sole proprietors are especially at risk if they are sued or owe debts on their businesses, because they don't have partners to help cover the financial commitment.

Tip

  • LLCs are relatively popular as of the time of publication among entrepreneurs who want limited liability protection but don't want the additional hassle, paperwork and tax burden of forming a corporation, according to the Nolo legal website. You can set up a single-member LLC in lieu of a proprietorship, or you can establish a multiple-member limited partnership.

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