Limited and unlimited liability

Liability is the legal responsibility a business owner has for the debts of the business. It matters because it decides how much of your own money is at risk if the business cannot pay what it owes.

Unlimited liability

With unlimited liability, the business and its owner are not legally separate. The owner is personally responsible for all business debts. If the business cannot pay, the owner may have to use personal savings, sell personal possessions or be made bankrupt. For example, if a one-person wedding photography business owes £3,000 but its cameras, laptops and other business assets are worth only £1,200, the owner must find the remaining £1,800 from their own money.

Limited liability

With limited liability, the company has its own legal identity, separate from the people who own it. Owners risk only the money they have invested, so their personal assets are protected if the business fails. For example, if you pay £4,000 for shares in a small board game company that later owes more than it can pay, you could lose the £4,000 you invested, but your personal savings stay safe.

What is protected

Limited liability protects the owners' personal assets, not the business's own assets. The company still has to pay its debts, so its equipment, stock and money can all be lost, and it may be closed down. Limited liability does not let a business avoid paying what it owes.