Many Washington business owners design their company’s legal structure to prevent being them being held personally responsible for its debts. However, some companies may have characteristics that places responsibility for business debts onto the company owners.
Definition of unlimited liability
Unlimited liability refers to a company owner’s responsibility to repay any debt their company may accumulate. This differs from limited liability structures, which prevents lenders from suing to obtain the personal assets of the business owner to cover debts. With an unlimited liability set-up, your personal assets may be seized to pay for business debts.
Common types of business debts that you may be held personally responsible for under unlimited liability include:
- Raw materials
Types of companies
Both general partnerships and sole proprietorships fall under unlimited liability. The owners are responsible for business debts, so a lawsuit will involve all of them.
However, limited partnerships do not fall under unlimited liability. In a limited partnership, at least one of the partners holds the title of “limited partner,” and does not hold responsibility for the company’s debts.
Pros and cons of unlimited liability
- Company owners often choose unlimited liability purposefully. They base their decisions on these benefits:
- They remain fully in control of the company.
- These types of businesses are easy to create.
- The pay structure may provide less hassle.
While these benefits may make unlimited liability arrangements look tempting, business owners must consider the cons as well. Any financial loss your business sustains will be passed to you. Due to liability concerns, partnerships typically dissolve if one of the partners dies.
Decide which options work best for your company
Unlimited liability works for some companies, but will not work for others. Decide which type of financial risk you want to take before you decide to choose unlimited liability for your company.