Not all UK business types are equal. When starting a new business venture in the UK, selecting the most suitable legal structure for your needs is essential. If you are about to set up a new business in the UK, you may be wondering what unlimited liability in business means. Understanding the differences between limited and unlimited liability business structures is extremely important for all UK business owners. Doing so will ensure that you start off your new venture with a full understanding of what you are entering into and the financial risks that you face. In this article, we will explain what unlimited liability in business means, how it works, and what its advantages and disadvantages are.
What does unlimited liability mean in business?
Unlimited liability in business means that business owners are personally responsible for all of their business’s debts and financial obligations. If an unlimited liability business gets into debt that it cannot repay, creditors can pursue the personal assets of the business owners. This may include their savings, property, and other personal belongings, such as vehicles. Liability with this structure extends beyond the assets of the business assets to include the owners’ personal assets.
Unlimited liability business structures are extremely common in the UK and typically take the form of sole proprietorships and general partnerships. But, any business in the UK that is not a limited liability company (ltd or plc) is, in effect, an unlimited liability business.
Unlimited liability businesses can be extremely high risk, but this is not necessarily always the case. Business owners should always assess the risks of an unlimited liability structure and control these as much as possible (see the section below on how to mitigate the risk of unlimited liability in business).
What is an unlimited liability company?
Like a limited company, unlimited liability companies must also be registered with Companies House, the official registrar in the UK. The main difference between a limited and unlimited company is that the latter exposes shareholders to unlimited personal liability. As such, unlimited liability companies are similar to sole trader businesses.
If you have never heard of an unlimited liability company, this is not surprising given that only around 5,000 people are registered with Companies House. Compare this to the over 5m companies registered with Companies House.
Owners may choose an unlimited liability company structure because there is no need to file annual accounts, and shareholders can be remunerated without the need to adhere to the Companies Act 2006. There is, however, a legal requirement to file a confirmation statement with Companies House each year, in the same way as a limited liability company.
For unlimited liability companies with more than one shareholder, the extent of liability for the debts of the company is determined by the shareholding percentage. The problem is that if one shareholder cannot cover their share of any company liabilities, the debt becomes the responsibility of the other shareholders.
What does limited liability mean in business?
Limited liability typically applies to private limited companies (Ltd) and public limited companies (PLC) in the UK. When it comes to the protection of personal assets, limited liability business owners are not personally responsible for business debts. In addition, a limited liability business is a separate legal entity from its owners. This means that it is the company, not its owners, that is responsible for its debts and obligations.
If you run a limited company that subsequently goes bankrupt, you will only lose your initial investment. Your personal assets will be protected from creditors and cannot be touched.
While limited liability comes with more legal obligations and responsibilities, many business owners prefer this structure for the legal financial protection it offers.
Limited vs unlimited liability
The following table summaries the main differences between limited and unlimited liability in business:
| Limited Liability | Unlimited Liability | |
|---|---|---|
| Personal asset protection |
Personal assets are protected from business debts |
Personal assets can be seized for business debts |
| Legal entity |
Separate legal entity |
No legal separation |
| Typical business Structures |
Private limited companies (ltd) and public limited companies (plc) |
Sole traders/proprietorships and general partnerships |
What are the advantages of an unlimited liability business in the UK?
Unlimited liability is not all about risk; it offers a number of advantages, as explained below:
- Greater level of business control – unlimited liability business owners have complete control when it comes to making business decisions without oversight and interference from shareholders.
- Administrative and regulatory simplicity – the flip side of taking on more personal risk is less administration and red tape. Establishing and managing the business is much more straightforward, with fewer regulatory requirements.
- No disclosure requirements – one of the key benefits of unlimited liability is the enhanced level of confidentiality for business owners. This is because businesses with unlimited liability are not required to disclose financial information publicly, providing greater privacy. On the other hand, when setting up a limited liability company, owners need to register the new entity with Companies House. As a result, company and trading information is made publicly available. Indeed, this is one of the main reasons that business owners opt for an unlimited liability business structure. For example, many businesses create unlimited liability companies with the primary objective of moving money around without the need to report earnings or taxes.
- Lower tax – unlimited liability businesses may pay less tax depending on the amount earned. This is because unincorporated businesses pay more tax the more they earn. On the other hand, incorporated companies pay corporation tax at a flat rate of 19% of all profits made.
What are the disadvantages of an unlimited liability business in the UK?
The main disadvantages of unlimited liability in business are as follows:
- Personal financial risk – Unlimited liability business owners can lose their homes and other assets if the business fails.
- Harder to raise capital – Potential investors are sometimes nervous about injecting capital into an unlimited liability business. As such, this model can make it harder to secure funding. If you don’t plan to raise capital, this may not be too much of a concern.
- Personal financial risk – Personal assets such as property, possessions, and money can be seized by creditors to settle any business debts.
- Partner and shareholder risk – Partners and shareholders of unlimited liability businesses may also be personally liable for any debts incurred or bankruptcy.
- Stress and pressure – The financial burden of running an unlimited liability business can be extremely stressful, affecting decision-making and personal well-being.
While the risk of running an unlimited liability business can be high, there are some measures that can be taken to mitigate this.
How can I reduce the risk of unlimited liability in business?
UK business owners can use strategies to mitigate the risks of running an unlimited liability, including applying for incorporation through Companies House and entering into a partnership agreement.
Incorporation
Incorporation is the main way that most business owners remove the risk of personal financial liability for their business’s debts. There is nothing to stop your business from being incorporated at any point. A business that starts off as unlimited liability can later switch to become a private limited company (Ltd). A specialist in company formations or company law Solicitor can explain how to convert from a sole trader business to a limited company or from a partnership to a limited liability partnership (LLP).
Partnership agreement
To mitigate the risk of unlimited liability in an unlimited liability partnership, shareholders can enter into a carefully drafted partnership agreement that provides the necessary protection. For example, the partnership agreement may set out the share of each partner in the business’s profits and losses. It is always advisable to get the specialist advice of a company law solicitor who can advise you on drafting a new partnership agreement.
Other mitigation measures
In addition to taking the above steps to mitigate the risks of unlimited liability, it is advisable to:
- Fully assess the risks and benefits of unlimited liability for your specific business and personal situation.
- Speak to a financial advisor or legal expert to explore the best structure for your business. They may recommend another more suitable business structure for your needs, and
- Consider the long-term implications on your personal assets and financial stability.
Conclusion
We hope that this article has given you all of the information you need to understand what unlimited liability means in business. In summary, unlimited liability is a straightforward but somewhat risky business structure which is suitable primarily for small businesses with lower risk levels and modest assets. Understanding the implications of unlimited liability based on your circumstances and risk exposure is crucial in making informed decisions about your business structure. It will also help ensure that your business structure aligns with your financial goals and appetite for financial risks.
For more information, speak to a company formation specialist, company law Solicitor, or financial professional who can help you make an informed decision about whether an unlimited liability business is right for you.
