unlimited liability
(noun)
The liability of an owner of a small proprietorship for all costs and debts of the business.
Examples of unlimited liability in the following topics:
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Disadvantages of Sole Proprietorships
- Sole proprietorships face a number of difficulties in the longer terms compared to limited liability companies.
- However, while there are certain advantages (it is easier to set up a sole proprietorship than a limited liability company, for instance), there are a number of big disadvantages, particularly in the long term, that make the sole proprietorship model quite unattractive to business owners.
- Unlimited liability: Your small business, in the form of a sole proprietorship, is personally liable for all debts and actions of the company.
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Pros and Cons of Sole Proprietorship
- The sole proprietorship structure has the benefit of simplicity and control but the drawback of unlimited liability.
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Types of Ownership
- A business with limited liability, and a wide variety of shareholders.
- A situation in which the liability of the owners of a business is limited to the full, paid-up value of the share capital.
- The owner of the business has total and unlimited personal liability of the debts incurred by the business.
- Each partner has total and unlimited personal liability of the debts incurred by the partnership.
- A situation in which the liability of the owners of a business is limited to the full, paid-up value of the share capital.
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Types of Businesses
- Primary ownership types of businesses include corporations, cooperatives, limited liability partnerships (LLPs), limited liability companies (LLCs) and sole proprietorships.
- The business owner has unlimited liability for the debts incurred by the business.
- In most cases, each partner has unlimited liability for the debts incurred by the business.
- Cooperative: Often referred to as a "co-op", a cooperative is a limited liability business that can organize as for-profit or not-for-profit.
- The ownership structure of a business determines their tax and legal liabilities.
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Types of Partnerships
- In most forms of partnerships, each partner has unlimited liability for the debts incurred by the business.
- The three typical classifications of for-profit partnerships are general partnerships, limited partnerships, and limited liability partnerships.
- General Partners thus carry more liability, and in cases of financial loss, the GPs will be liable.
- Limited Liability Partnership:A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liability.
- This is an important difference from that of an unlimited partnership.
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Advantages of Corporations
- Shareholders of a modern business corporation have limited liability for the corporation's debts and obligations.
- When a person owns shares in a corporation, the losses cannot exceed the amount invested in the shares, which is called limited liability.
- Unlike a partnership or sole proprietorship, shareholders of a modern business corporation have limited liability for the corporation's debts and obligations.
- Without limited liability, a creditor would probably not allow any share to be sold to a buyer at least as creditworthy as the seller.
- However, some jurisdictions also permit another type of corporation, in which shareholders' liability is unlimited, for example the unlimited liability corporation in two provinces of Canada, and the unlimited company in the United Kingdom.
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Characteristics of a Corporation
- A corporation is a group having a continuous existence, powers, and liabilities independent of the existences of its members.
- Limited liability is a concept whereby a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability.
- If a company with limited liability is sued, then the plaintiffs are suing the company, not its owners or investors.
- By contrast, sole proprietors and partners in general partnerships are each liable for all the debts of the business (unlimited liability).
- Therefore, shareholders experience some loss of privacy in return for limited liability.
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Limited Liability Companies (LLCs)
- If you decide to set up an LLC, your liability depends on the amount you have invested.
- This could happen if your liabilities were unlimited.
- Limited liability company members may, in certain circumstances, also incur a personal liability in cases where distributions to members render the LLC insolvent.
- However, most states do not dictate detailed governance and protective provisions for the members of a limited liability company.
- In essence, this franchise or business privilege tax is the fee the LLC pays the state for the benefit of limited liability.
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A Brief Definition of Sole Proprietorships
- A sole proprietorship is owned and run by one individual who receives all profits and has unlimited responsibility for all losses and debts.
- The individual entrepreneur owns the business and is fully responsible for all its debts and legal liabilities.
- The owner receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and debts.
- This means that the owner has no less liability than if they were acting as an individual instead of as a business.
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Debt-to-Equity Ratio
- Debt is typically a long-term liability that represents a company's obligation to pay both principal and interest to purchasers of that debt.
- The returns an equity holder can achieve have unlimited upside, however, they are typically the last to be paid in the event of a bankruptcy.
- When used to calculate a company's financial leverage , the debt-to-equity ratio includes only long-term liabilities in the numerator and can even go a step further to exclude the current portion of the long-term liabilities.
- This means that other short-term liabilities, such as accounts payable, are excluded when calculating the debt-to-equity ratio.