Difference Between Limited Liability & Unlimited Liability

Written by k.a. francis
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Difference Between Limited Liability & Unlimited Liability
Partnerships can be an asset or a liability. (businessmen handshake 6 image by chrisharvey from Fotolia.com)

A partnership can create a powerful business structure. Two or more people bringing their expertise and assets to a business gives the business a strength not usually found in a sole-proprietorship. However, along with that expertise there can also be an element of danger, depending on the partnership structure. This danger involves the type of partnership that is entered into: a limited or unlimited liability arrangement.

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Limited Liability Defined

Limited liability means that each partner's debt responsibility is limited to his investment in the business. He cannot be held personally responsible for the debts of the other partners. If the business is sued or forced to close, each partner's business assets can be liquidated, but his personal assets are safe.

Definition of Unlimited Liability

Unlimited liability means that all partners are responsible for all business debt, no matter how it was created. If one partner's actions cause the business to be sued, all partners would be party to the lawsuit, not just the partner whose action caused the lawsuit.

Differences Between Limited and Unlimited Liability

Limited liability offers personal protection for each business partner whereas unlimited liability does not. In the event of a lawsuit or a business closure, partners with unlimited liability could lose both business and personal assets. Partners with limited liability would only stand to lose the assets they have invested in the business but not their personal assets.

How To Minimize Risks

When entering a partnership, it is wise to investigate each person that will be a part of the business, and only form partnership with those you trust completely. It is also advisable to have a contract drawn up that details the rights and responsibilities of each partner and how business decisions will be made. In the event that a partner does create a situation that jeopardises the company, this document can be used against them later.

Remedies

If you are held responsible for the actions of another partner, you can sue that partner for any losses you incur. The document described in Section 4 can be used to prove the partner went outside the bounds of the partnership, and you deserve to be compensated for their misdeeds.

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