Cambridge O Level Business Studies · Syllabus 7115 · Understanding Business Activity
Unlimited Liability
What is Unlimited Liability?
The legal position in which the owners of an unincorporated business are personally responsible for all of its debts, so their private possessions such as savings, vehicles or a home may be used to settle what the business owes. It arises because the business has no legal identity separate from its owners.
This definition is part of the Understanding Business Activity chapter in Cambridge O Level Business Studies.
Questions students ask about Unlimited Liability
What is the difference between a sole trader and a partnership?
A sole trader is a business owned and controlled by one person, who provides the capital, keeps all the profit and carries unlimited liability for the business's debts. A partnership is owned by two or more people who share the capital, the decisions, the profits and, in most cases, unlimited liability. Both are unincorporated, with no legal identity separate from their owners. A partnership brings more capital and shared skills, but control, profit and risk are shared too.
Does limited liability mean a company cannot fail?
No. Limited liability limits the shareholders' personal loss to the amount they have invested in shares, because an incorporated company is a separate legal person from its owners and their personal assets are not available to the company's creditors. The company itself can still fail, and shareholders can still lose that investment in full. Limited liability is created by incorporation, which is why sole traders and most partnerships have unlimited liability instead.